Selling a stake in the family business via employee trust

Family businesses face the same issues as non-family businesses but also have to consider other challenges.

These include conflicts, lack of control of the business, separating business from family, nepotism, family members leaving without notice or reasons, and unclear succession plans.

When family members have decided that the business should be run by people other than the family, selling a stake to an Employee Ownership Trust (EOT) could be a solution for all parties.

Although employee ownership has been championed for many decades it was only when EOTs were introduced in 2014 that significant tax advantages could be accessed by both the shareholders and employees.

The main tax incentive to shareholders is that no tax will be payable on the sale provided more than 50 per cent of the shares are sold to the EOT.

For employees of an EOT owned company they can each receive income tax free bonuses of up to £3,600 per tax year.

We are finding that a lot of family businesses are adopting the employee ownership model as there are other advantages such as: motivating employees and increasing production; allowing the founders legacy to continue; and increased innovation.

HMRC is currently consulting with various parties to make sure that EOTs are achieving the objectives they were originally created for and make the rules governing them simpler.

There are a number of potential pitfalls that impact on a family-owned business transitioning to Employee Ownership.

Beever and Struthers has advised on over 20 successful sales to EOTs of family-owned companies helping this be a relatively stress-free experience compared with selling to another company such as a competitor.