Plan for succession with an EOT

Employee Ownership Trusts (EOTs) were introduced by the government in 2014 to provide a tax efficient structure for the sale of a controlling interest in a trading company to its employees.

The flexibility and tax advantages of EOTs have helped them gain traction as an exit strategy in recent years, especially given the current economic outlook.

Using EOTs for succession planning can allow the owner of a business to pass on the company to its employees for full market value without incurring a CGT charge. This method of sale can provide an alternative to external sales, management buy-outs or private equity backed buy-outs.

The advantages of using a qualifying EOT for succession planning are as follows:

• an immediate purchaser for the trading company
• no capital gains tax on the vendors
• enables succession in family companies where nobody in the family wants to continue
  the business
• encourages employees to take a more active and constructive interest in the business
• flexibility for current shareholders to sell all or some of their shares (subject to limits required by the controlling interest and limited participation requirements)
• current owners can remain as directors and receive market rate remuneration
• companies owned by EOTs can pay tax-free bonuses to their employees of up to £3,600, although NIC still remains payable

An incorrectly structured sale to an EOT can have adverse and unexpected tax consequences, therefore it is important to seek professional advice from an advisor with previous experience setting up EOTs before proceeding.

If you would like further information on Employee Ownership Trusts, please do not hesitate to contact the Pierce Corporate Finance Team.