Latest News about Employee Ownership

In this issue:

  • Latest developments on new tax reliefs and employee ownership trusts
  • Employee Ownership Association 2014 Annual Conference
  • Upcoming Autumn Statement

Employee ownership trusts

In previous newsletters, we have reported on the progress of the Government’s recent initiative to promote increased employee ownership, and in this newsletter, we are providing an update on developments over the past few months.

Since the tax reliefs were first announced, we have been working with various companies which have been exploring the possibility of making a transition to employee ownership using the relief where the sale of a controlling interest in a business to an indirect employee ownership trust (“EOT”) is entirely free from capital gains tax (CGT).  A second tax relief is that bonuses paid to employees of companies controlled by an EOT benefit from an income tax (but not National Insurance) exemption.

In this relatively short period, we have successfully completed transactions for two clients, and are actively working on similar projects with various others. We are setting out below how such a transaction might work, based on our experience.

ProcessTypically, a company establishes an EOT and seeks prior clearance from HM Revenue and Customs that any tax payable by UK taxpayers on the proceeds of the sale of their shares to it would be CGT (rather than dividend income tax). Once clearance has been obtained, full relief against CGT can be claimed.

Professional advice will normally be sought on the company’s current value, and the company’s shareholders will then enter into a contract with the EOT under which the EOT agrees to purchase at least a majority of the shares in the company.

An EOT can be funded by a company out of its profits.  The EOT can make an initial payment to the selling shareholders financed by the company’s retained profits, with the intention that the balance of the purchase price will be paid over a period of years out of future profits.

Where it is not intended that an EOT will distribute any of its shares to employees, employee ownership is indirect – through the EOT – and rewards for future performance can be based on a broadly-based bonus plan making use of the income tax relief for employees of companies controlled by an EOT.  This type of indirect employee ownership structure will often be preferred where there is no perceived need for employees to benefit from capital growth. It also has the added advantage that it eliminates the need for regular sales or purchases of shares by or between employees.

Although an EOT might be a company’s controlling shareholder, that does not mean it runs the company.  The day-to-day management of the company remains the responsibility of its directors.


An EOT is operated by its trustees. There are no particular restrictions on who might act as a trustee and the trustees could include, for example, employees, directors and/or independent persons from outside the company.  As the beneficiaries of the EOT will be the company’s employees as a whole, the trustees have a duty to act in the best interests of the employees as a group.  To a considerable degree, this might entail ensuring that the company is managed effectively by its directors, invests prudently for the future and that it generates consistent profits to be shared with employees.  The trustees would also be likely to encourage a corporate culture which is positive and rewarding for its employees.

We would be happy to discuss any aspect of these arrangements with all those who are interested in exploring further what opportunities there might be.

Employee Ownership Association 2014 Conference

We have just stepped off the train from Nottingham, where we were attending and exhibiting at the Employee Ownership Association 2014 Annual Conference (and also chairing a workshop on transitioning to employee ownership). Attended this year by 500 people, it is a fascinating event and essential for any company or adviser interested in employee ownership.

Autumn Statement

The Chancellor of the Exchequer will make his Autumn Statement on 3 December 2014. This might include a progress report on the consultation exercise launched in July 2014 following recommendations from the Office of Tax Simplification.

The first review concerns the tax treatment of shares (or other securities). At present, a tax charge will, broadly, arise at the point at which shares are acquired by an employee for less than their market value, unless the acquisition is pursuant to a tax-advantaged scheme. This can cause difficulties where the shares cannot be sold to fund the tax liability, and there can be significant time (and expense) in agreeing with HMRC what the shares are worth. The OTS’s main proposal is that a tax charge should in future arise only when the employee was able to sell the shares.

The second review relates to the possible introduction of an employee shareholding vehicle (sometimes referred to as a safe harbour trust) which would be simple to set up and operate and would act as a warehouse and marketplace for employee shares. It would be designed to benefit from certain exemptions under tax legislation, and would be an alternative to a traditional employee benefit trust (but would not offer the tax reliefs associated with an EOT).

Both these reviews deal with complex areas of law and tax, and the Government will be concerned to eliminate any opportunities for tax avoidance which might otherwise arise as a result of implementing the proposals. The consultation period closed on 10 October 2014. It is unlikely that draft legislation will be forthcoming in the near future, but the Chancellor might comment on the outcome of the consultation.

If you or your clients would like to discuss any of the developments mentioned in this newsletter, please contact:

Robert Postlethwaite
David Reuben
Stephen Chater
Judith Harris
or call us on 020 7470 8805