Employee Ownership Trust

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Tax incentives for companies majority owned by an employee ownership trust.

The Finance Act 2014 introduced two tax reliefs designed to encourage and support the creation and growth of employee-owned companies.

Watch our animated guide to Employee Ownership Trusts

1. Full relief against capital gains tax

No CGT if you sell more than 50% of company to an EOTThe sale of a controlling interest in a business to an employee ownership trust (EOT) will be entirely free from capital gains tax (CGT).

An EOT must meet the following main requirements:

  • The company whose shares are transferred must be a trading company
  • The EOT must meet the “all-employee benefit requirement” – see below.
  • The EOT must not hold a controlling interest of more than 5% in the company before the transfer to it. However, the EOT must hold a controlling interest in the company at the end of the tax year in which the transfer to it takes place.
  • Where the transferor has an interest of more than 5% in the company in the 12 months before he transfers his shares to the EOT there is an additional requirement. The requirement is that the number of employees who hold 5% or more of the company must not exceed two fifths of the workforce generally.
The “all-employee benefit requirement”

Broadly, if the EOT provides benefits (such as cash or shares) to individual employees, it must generally do so in favour of all eligible employees, and must do so on the same terms. The EOT cannot, therefore, skew benefits to the advantage of particular employees, although it can allocate benefits of differing amounts by reference to factors such as salary, length of service or hours worked.

2. Income tax free bonuses

Income tax free bonuses if EOT holds more than 50% of the companyBonuses paid to employees of companies controlled by an EOT benefit from an income tax (but not national insurance) exemption.

The key requirements for income tax relief are:

  • The employer company must be a trading company.
  • A controlling interest in the company must be held by an EOT for at least twelve months.
  • Provisions very similar to the all-employee benefit requirement for the CGT exemption also apply to the income tax exemption.
  • The trust must have existed as an “all-employee trust” for at least twelve months.
  • The company should not have more than a ratio of 2/5 for office holders and directors to employees.
  • There is a maximum limit of £3,600 income tax free bonus per employee per tax year.
  • The payment must not consist of normal salary, must not be made by a service company and must be made under an arrangement under which:
    • all employees of the company, or, where there is a group, any group company must be eligible to participate in any award (although employees with continuous service of less than 12 months can be excluded); and
    • all employees participating in the arrangement must do so on equal terms (although awards can be determined by reference to pay, length of service or hours worked).

If you would like to explore how employee ownership might be introduced in your company, please contact us for an initial discussion.

We are happy to meet at our offices without charge or commitment and will be very pleased to hear from you.