Are you currently exploring your succession options and trying to work out which one best suits you and your company? If an EOT is one of the routes you are considering, here are 5 questions we often ask business owners at the initial stages of an enquiry and that you should have a think about first.
Your answers to these 5 key questions will generally enable us to give initial guidance* – (we have simplified the requirements in some parts):
1.Why are you interested in an EOT?
Whilst most companies create an EOT for ownership succession (the EOT buys shares from existing shareholders), this won’t always be the case. It will be helpful to know why you’re interested in setting up an EOT and, if it is for succession reasons, how it compares for you with other potential choices such as a trade sale and what your main motivators are for choosing the EO route.
2. Are you a limited company?
The EOT tax reliefs* are only available where your business is run through a limited company with shareholders. If your business is a partnership or limited liability partnership (or you are a sole trader), it will first need to be incorporated.
*The tax reliefs:
- Those selling their shares may do so free of capital gains tax
- Once a company is owned by an EOT, it can pay annual bonuses to its employees free of income tax
3. Is your company a trading company?
Most companies running a business are a trading company, but occasionally a company will also own investments (such as freehold property or shares in listed companies) which could mean it is really an investment vehicle. In this case, it would mean the EOT tax reliefs were not available.
4. How many employees, how many shareholders, how many directors?
The EOT CGT exemption requires a maximum 2/5 ratio between:
- shareholders who (a) are also employees and (b) hold 5% or more of shares in the company (or shares of a particular class)
For example, a company with four shareholders (who are also employees) holding 25% each must have at least ten employees in total.
If you want to be able to pay income tax free bonuses once your company is owned by an EOT, there is a similar maximum ratio although here it is between people who are (a) directors and (b) employees or directors.
5. Are you happy that an EOT benefits all employees and that the trustees of the EOT will control the company?
The EOT was created to encourage companies to create an ownership stake for all their employees. So where the EOT provides financial benefit to employees, it must do so for everyone on the same terms (either the same benefit for each employee, or different amounts according to remuneration, length of service or hours worked).
The EOT will have to acquire more than 50% of the shares in your company if you wish to claim the EOT tax reliefs. That will mean that, although you can generally continue as a director if you wish to, shareholding control will pass to the EOT trustees.
So there you have a few taster questions we are likely to ask in an initial discussion and for you to have a think about. Every client is unique and we will always tailor our approach and advice to your company’s situation and requirements.
Read more about EOTs here.
*we can give initial guidance as stated with answers to these questions but will only be able to confirm for definite if formally engaged to advise.