The Rise of the Employee Ownership Trust

Insights - 30/03/2021

There was much uncertainty from business leaders earlier in the month as 3rd of March 2021 approached, with many commentators having incorrectly predicted a change to CGT rates that would see them fall in line with income tax.

There were also questions as to whether any CGT reliefs would be removed or reduced. However, notwithstanding the impact of COVID on the national debt, as always, CGT reforms that raise short term revenue must be balanced with tax incentives which support policies that stimulate longer term investment, stability and higher employment.

One such policy incentive, introduced by the coalition Government to encourage the ‘John Lewis’ economy is CGT relief on the transfer of a business to employment control / ownership. Whatever the current challenges facing John Lewis, brought about by the uncertain future of the high street, employee-owned businesses have historically tended to display greater resilience to economic fluctuations, along with the longevity and independence that employee democracy can bring.

So, what is an employee ownership trust (EOT).

Employee Ownership Trusts

An EOT is a trust to whom owners of a trading company / group can transfer their shares and which is established to hold such shares for the benefit of its employees. In order for the transfer to qualify for the valuable CGT reliefs, it must, amongst other things, meets all of the following criteria:

  • The Trading Requirement – the company must be a trading company or the principal company in a trading group;
  • The all-employee benefit requirement – the EOT must use the shares for the benefit of all eligible employees on the same terms (subject to very specific exceptions); and
  • The controlling interest requirement – the EOT must hold more than 50% of the ordinary share capital and voting rights of the company and be entitled to more than 50% of the profits available for distribution or assets on a winding up.

Normally, the EOT uses a limited company as the sole corporate trustee (Trustee), the directors of which (Trustee Directors) are appointed at the time as the transfer of the shares to the Trustee, and, typically (but not always), the Trustee Directors will comprise at least one of the selling shareholders, a senior member of management and an independent expert. The target will also usually change its board to ensure that there is sufficient representation by the employees (sometime including by way of an employee council).

In broad terms, the key advantages of transferring shares in your company to an EOT include:

  • Tax – presently, no capital gains, income or inheritance tax is payable on the (or as a result of) the disposal. Employees can also be paid annual tax-efficient bonuses.
  • Succession planning – a seller has a readymade buyer for their shares and has the additional comfort of knowing the business will be left in good hands.
  • Continued involvement – whilst a seller must sell a controlling interest, they can retain up to 49% of the shares in the Company. Even if they transfer 100% of the shares, a seller is likely to stay involved, particularly as a substantial part of the purchase price will be deferred and funded by the profits of the Company over a number of years.
  • Value – one of the common misconceptions of a sale to an EOT is that the owners are giving their shares away. This is not true and EOTs are not philanthropic structures. The shares may be sold for full market value, subject to obtaining clearance from HMRC.
  • Performance – recent studies have found that employee ownership generally improves the performance of existing staff members as well as greatly improving a company’s ability to attract new staff.

At Morrisons we have expertise in advising on employee ownership trust sales and we work with corporate finance advisors and independent trustees to provide a full service.

If you would like to discuss any of the issues raised in this article please contact the Corporate and Commercial team at Morrisons by emailing Greg Vincent (Head of Corporate and Commercial) at [email protected] or emailing Alex O’Leary (Senior Associate in the Corporate and Commercial team) at [email protected]

Other articles from March's newsletter

Disclaimer:

Although correct at the time of publication, the contents of this newsletter/blog are intended for general information purposes only and shall not be deemed to be, or constitute, legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article. Please contact us for the latest legal position.