November 5, 2024
The government has announced that it will increase the main rates of CGT from 10% and 20% to 18% and 24% respectively. The change will take effect for disposals made on or after 30 October 2024. However, the CGT relief for a sale to an EOT remains the same. Provided that certain qualifying conditions are met, shareholders who dispose of their shares to an EOT can claim a full UK CGT exemption on the disposal. The increase to CGT rates arguably means that a sale to an EOT now offers even more of tax incentive in comparison with more traditional routes such as a third-party sale or a management buyout.
Introduced in 2014, EOTs are a government initiative providing business owners the opportunity to sell their shares to an employee-owned trust. A trust will essentially own a controlling stake in a company which is held for the benefit of the company’s employees.
A sale to an EOT offers not only tax advantages for selling shareholders but also provides several unique commercial benefits, including:
Enhanced employee engagement
When a business transitions to an EOT, employees gain a vested interest in the company’s success. This shared ownership often translates into higher levels of initiative, retention and increased productivity. It fosters a collaborative environment where everyone is aligned with the company’s goals, ultimately fuelling long-term success and sustainability. There are also financial benefits as well for employees via annual bonuses or share option schemes run in connection with the EOT. For example, a company owned by an EOT can pay annual bonuses of up to £3,600 per employee free of income tax.
Flexibility for selling shareholders
A unique feature of the EOT structure is its adaptability when it comes to structuring the transaction to suit a seller’s personal needs. It is also particularly useful if there are a number of selling shareholders who have differing needs. Certain shareholders may wish to exit the business straight-away and have no further involvement with the company, whereas other shareholders may to wish to continue some involvement with the company. The sale can be structured to accommodate these competing interests. Further, while the trust must hold a majority stake, sellers have the option to retain up to 49% of the company’s share capital. The EOT model is particularly valuable for founders who have dedicated years to building their business and wish to remain part of its future success without the demands of full ownership.
Maintaining company culture
A sudden shift to new ownership, especially if external parties are involved, can be disruptive to company culture, business operations and employee morale. The EOT model minimises these risks by allowing for a phased transition of leadership and ownership. Ownership can change hands without disrupting the core business operations, as senior management and staff continue to drive the company forward. This continuity is further strengthened when selling shareholders retain an active role in the business, enabling them to uphold the company’s values and help steer the new generation of the company’s leaders.
As CGT rates increase, the tax advantages of selling to an EOT have arguably only become more attractive. However, for business owners who are succession planning, the decision to sell to an EOT should not be purely based on tax savings. Deciding if a sale to an EOT is the best path for you and your business depends on various factors, including your personal goals, the company’s financial position and long-term prospects, and the aspirations of the company’s employees. Seeking tax and legal advice, along with involving senior employees early in succession planning, can help determine if employee ownership is the best choice for you.
Get in touch with one of Darwin Gray’s expert M&A lawyers for a no-obligation chat about your possible succession options and if an EOT could be right for you and your business. Contact us on 02920 829 100 or via our contact form.
