If you are looking to plan your exit from your business, whether for retirement or to start your next venture, we know you want to achieve this as tax-efficiently as possible.
Employee Ownership Trusts (EOTs) are an increasingly popular way for business owners to exit while securing the future of their company and employees – not least because they offer significant tax savings over other exit strategies.
Understanding EOTs
As an exit strategy, an EOT is created when you sell a controlling interest (51 per cent of shares or more) to a trust set up for the benefit of your employees.
This trust buys and holds shares on behalf of the employees, who do not buy them directly, often financing the sale through future profits made by the business.
Updates in the 2024 Autumn Budget have clarified some points in the legislation around EOTs – meaning you must comply with certain rules to be eligible for Capital Gains Tax (CGT) relief.
The trustees must have paid fair market value for the business and there is now a more stringent ‘trustee independence requirement’, requiring at least half of trustees to be independent of the seller.
In practice, this means that you, or people connected to you, cannot make up more than 50 per cent of the trustees.
In practice, this means there must be at least one other trustee who is not connected to you, or you may be required to pay CGT up to four years after the sale, known as the ‘clawback’ period.
Are they tax-efficient?
EOTs offer several tax efficiencies over other forms of exit, such as a sale to a group or an independent buyer, including:
- CGT exemption – When you sell a controlling interest to an EOT, your gains are exempt from CGT if you meet certain requirements, allowing you to keep the full value of your shares.
- Inheritance Tax – Assets transferred into an EOT are excluded from your estate for Inheritance Tax purposes, making EOTs particularly handy for retirement.
- Income Tax benefits – EOTs are tax-efficient for employees too, offering tax-free bonus allowances of up to £3,600 per year.
Providing you abide by the latest regulations, EOTs can be a tax-efficient way of exiting your business.
Need advice on setting up an EOT? Contact us today.
