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To encourage greater employee ownership, the government introduced a capital gains tax (CGT) relief in 2014 for business owners who sell their companies to employees.
An individual does not pay CGT if:
The relief enables a shareholder to maximise their gain but avoid CGT.
On the employer side, the UK has an All company or group employees must benefit but not those with an interest of 5% or more.
Employees with less than one year of service and directors can be excluded. Apart from that, all employees must receive some benefit. However, the amounts can be varied by:
No other factors can be taken into account. If more than one of the factors is used, each factor must give rise to a separate entitlement.
The trust terms must not permit:
There is a look-back of 10 years before the sale to see if employees have been non-eligible. In addition, interests in related companies and interests held by connected persons can be caught.
Some existing trusts created before 10 December 2013 which would not meet these requirements may be treated as doing so.
In the tax year of the sale, the EOT must go from not having a controlling interest in the company to having one.
A controlling interest means all of the following:
The trustee is treated as entitled to dividends even if the trustee waives its entitlement. A term in a loan to the trustee giving the right to take control of the company on default is ignored.
The relief is not available if individuals with a substantial shareholding in the company make up a significant proportion of the business's workforce before and after creating the EOT. Employees who own 5% or more of the company must not make up 40% or more of the employees after the sale.
The relief can only be claimed once and can be revoked if certain events occur in the tax year following the sale. These events include:
In later tax years, these disqualifying events can lead to tax charges for the EOT instead of the seller.
The relief can also be available on transfers from family trusts to EOTs.
To finance the purchase of the shares, the following options are available:
The tax implications of each of these routes need to be carefully considered.
There is an income tax exemption for bonus payments of up to £3,600 per employee per tax year made by a company owned by an EOT. However, there are some slight differences in the conditions for this income tax relief and National Insurance contributions remain payable.
We can provide businesses with independent legal and tax advice to ensure they make an informed decision and fully understand the consequences of selling to an EOT.
If you would like to discuss any UK employment tax issues, please contact us.