Where a trade sale is not on the horizon and the management team cannot raise funds for an MBO, business owners can be faced with difficulty when planning for their own exit and the succession of the business.
Employee Ownership Trusts ("EOT") can provide a tax efficient solution to this problem. An EOT can acquire between 51% and 100% of the shares in a trading business. These are then held 'on trust' for the employees: they do not hold shares directly, but indirectly via the trust.
Some of the benefits of Employee Ownership Trusts for SMEs are as follows:
To qualify for Employee Ownership Trust ("EOT") tax benefits the following criteria must be met:
What to look out for when operating an Employee Ownership Trust
If any of the following occur in the first year following the tax year in which the EOT structure was created, the CGT relief is withdrawn:
Where these events occur at a later date, a tax charge may arise on the trustees. For this reason, an overseas trustee is often used.
The Employee Ownership Trust model was based around the John Lewis Partnership’s (JLP) long-running and successful business ownership model.
Employees of JLP– referred to within the company as partners – hold shares in the business, held collectively in trust by JLP. Shares cannot be sold by any individual partner, but each partner receives economic benefits based upon their ownership of the shares – most notably by way of a yearly profit share, varying year by year but usually between 10 and 20 percent of the partners’ yearly earnings. Find out more.
We would be happy to provide advice and guidance regarding setting up and operating and EOP.
The information on these small business guide pages do not constitute legal advice, it is simply information. You should always seek independent legal advice.
Farringford Legal can advise you on all the topics covered.
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