Many entrepreneurs and business managers work hard their whole lives to grow their business without thinking about the best way to structure an exit to maximise the value of all their hard work.
Limits of business asset disposal relief
Business asset disposal relief (formerly entrepreneurs’ relief) reduces the amount of capital gains tax (CGT) payable on a disposal of business assets but it is subject to certain qualifying conditions throughout the two-year period before sale. There are also limitations on the amount of relief you can claim: if you are entitled to the relief and make a qualifying disposal after 11 March 2020, gains of up to £1 million only for each individual will be charged to CGT at the rate of 10%. Any additional gains will be subject to CGT at the main rate (currently 20%).
Employee Ownership Trust benefits
However, there is an alternative option for business owners which does not involve the stress and uncertainty of trying to find a trade buyer or private equity investor. More and more business owners are setting up employee ownership trusts (EOTs) for the benefit of all their employees. A sale of a majority of a company’s shares to an EOT may be done tax-free for the selling shareholders, and eligible employees will be entitled to tax-free bonus payments of up to £3,600 each tax year going forward.
Tax clearance and key questions
HMRC tax clearance can be obtained in advance relatively quickly subject to certain qualifying conditions being met. Key issues for consideration include:
- What proportion of the company’s shares will the EOT buy?
- What is the market value of the company and what price will be payable for the shares to be sold to the EOT?
- How will the price payable be funded and how long will it take to be paid?
- Who will act as trustees to manage the EOT and liaise with the company board going forward?
- To what extent will the original owners continue with the business and how will they be remunerated?
The answers to these questions will impact the legal structure and implementation. There are various legal nuances which may affect your tax relief so beware: if your EOT is not set up properly at the outset, you may prejudice your tax relief and could end up paying significant amounts to HMRC.
If you have questions about whether an EOT is suitable for you and what your next steps are, please contact Andrew Bretherton for a free consultation.
This article is for general information purposes only and does not constitute legal or professional advice. It should not be used as a substitute for legal advice relating to your particular circumstances. Please note that the law may have changed since the date of this article.