Employee Ownership Trusts

The Use of Employee Ownership Trusts

The decision to relinquish control of your business can be challenging. This could be due to the difficulty of finding a trustworthy succcessor or the desire to ensure a sale at the right price.

Traditional routes to market often involve working with corporate finance advisers, approaching competitors or colleagues in the industry or passing on the business to a family member or management. There are pros and cons to each route and each business will be different.

However, one approach that we believe deserves more recognition is the option of giving or selling your business to an Employee Ownership Trust.

Quick Enquiry

What Is an Employee Ownership Trust?

Employee Ownership Trusts were introduced by the government to encourage employee ownership of business. They must meets certain requirements:

• The company must be trading.
• The Employee Ownership Trust must control the company.
• The Employee Ownership Trust must be established for the benefit of all employees.
• All employees must receive equal benefits from the Employee Ownership Trust.

The trustees, as shareholders, have a certain degree of control of the business and need to conduct themselves in the best interest of the employees.

This is therefore attractive both to those looking to create a business owned for the employees and those looking to sell in a tax efficient way. 

The price is usually funded over time by the company itself, although it is possible to enter into more complex financing arrangements involving lenders (particularly with larger businesses).

Key benefits of selling to an Employee Ownership Trust

• The sale of the shares should not incur any capital gains tax or inheritance tax liability.
• Employees can receive tax free bonus payments of up to £3,600 each tax year.
• The sale can take place over time and at a pace that suits the selling shareholder.
• The absence of significant changes in management personnel means minimal disruption within the business.
• The company remains independent from third party influence.
• Unlike in a traditional business sale, the sellers are not usually required to provide extensive warranties and indemnities to the Employee Ownership Trust.

An example

Your Limited is on the market for £10m but no one has expressed an interest in it.  If you sold it to an Employee Ownership Trust for £9m, you would be able to achieve a simpler sale to trustees, and walk away with the same amount of money since there is no tax to pay.  

You could rest assured that the trustees (which might even include you) will manage the company in a prudent way, and with the best interest of all the employees in mind.

The operational management of the business will usually remain with current management team although the trustees of the Employee Ownership Trust may require an employee representative on the board.

How we can help you

With expertise in tax, corporate law, family business and trust management, our multi-disciplinary team of lawyers will work together to find the right solution for the owners, the company and the employees. 

We will guide you through the entire process, including:

• Deciding the terms of the sale together with your accountants or financial advisers.
• Transferring ownership of the company.
• Advising you on the tax treatment. 

We can help wherever you are based, via our offices in London, Watford, Bristol and Birmingham.

Are you considering selling your business to an Employee Ownership Trust? Get in touch now by completing the form below.