Employee-ownership trusts: UK tax considerations
Market Insight 2022年5月11日 2022年5月11日
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:
- they sell equity shares
- the shares are in a company that carries on a trade itself or its subsidiaries do so
- a trust that meets the conditions to be an employee-ownership trust (EOT) buys the shares
- the EOT acquires a controlling interest
- individuals with a substantial shareholding are not a significant proportion of the business's workforce
The relief enables a shareholder to maximise their gain but avoid CGT.
Trust Requirements to be an EOT
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:
- length of service
- hours worked
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:
- non-employees to benefit
- employees with more than 5% interests to benefit
- shares being transferred to another trust except for another EOT
- loans being made to the employees
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:
- holding more than 50% of the shares and votes
- being entitled to more than 50% of the profits and the assets on a winding-up
- trustee consent is required for any reduction in its entitlement
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.
Individuals with a Substantial Shareholding
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.
Claiming the Relief
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:
- the company ceasing to trade
- the trustee ceasing to be for the benefit of all eligible employees or ceasing to control the company
- individuals with a substantial shareholding starting to make up a significant proportion of the business's workforce
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.
Financing the EOT
To finance the purchase of the shares, the following options are available:
- the EOT borrows money from a bank
- the company borrows money and lends it to the EOT
- the company borrows money and makes contributions to the EOT
- shares are sold on a deferred payment basis
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.
How we can help
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.