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Employee Ownership Trusts – a revolution?

11 October 2019
Has the introduction of a tax relief and new ownership structure been slowly changing the face of UK business?  The use of an EOT will generate tax-free capital gain, while providing benefit to employees.

The idea of the UK being a "nation of shopkeepers" originated from revolutionary France. The phrase was first used as a derogatory term, but has been more recently used in a positive way to suggest that we are, in fact, a nation of entrepreneurs.

While being a nation of entrepreneurs has many benefits, it does tend to lead to a significant number of businesses being sold and restructured rather than continued for the future of the community. This is often because the entrepreneur wants to realise the fruits of their labour and exit the business, leaving it to continue without them.

In the past, the only way for owners of the business to realise the capital that they have created would be to sell to third party investors, or to somehow orchestrate a management buyout. Generally the preferred route is to sell to an outside investor as the entrepreneur would realise most of their profit early in the sale. 

Often a third party sale involves a much larger group, or a Private Equity buyer, with little interest in the culture of the business or what has made it successful over time. Many entrepreneurs want the business they have spent their life creating to remain independent after their retirement, without the burden of large debt on the management that can occur as a result of a management buy-out.
The EOT was introduced in 2014 with the intention of helping local businesses remain local and to encourage more employee ownership models. Importantly for the business owners, any sale of the business to an EOT is tax free. This means that the owners can extract the proceeds of sale over time without facing a tax liability with nothing to pay it with. Additionally, it allows the owners to remain involved with the business to ease the transition for the continuing employees and management.

The legislation provides flexibility to allow the payments to be made over time, or through third party debt, which is becoming more popular as a way of part funding the sale. It also allows the business owner to retain part of their shareholding after the event, allowing them to benefit from any future sale or restructuring of the business and its future growth.

Retiring business owners who want to try to help their employees continue their legacy and help the business to succeed may find that the EOT is a useful option. It allows the continuation without forcing the new management to find personal debt to fund the buyout. In addition, the stresses and inevitable price chipping involved in a third party sale can be avoided.

The icing on the cake of the EOT is the fact that the proceeds of the sale of the business can be received by the entrepreneur tax-free. The flexibility provided ensures that many more types of business can consider this option rather than the more limited sale options previously available.