Sale of Business to Employees

So, what is a sale of business to employees or an Employee Ownership sale? In simple terms, it is the sale of company shares to a trust which holds them for the benefit of the company employees, or, in other words, you are simply selling your business to employees.

Employee Succession – some options

A quick overview of some methods of passing shares to employees:

• Context of a Family business – bringing in the next generation by way of gift of shares (whether outright or via trust) who are already working in the business.

• Share / option incentive arrangement – such as EMI or SIP – but this might be a considered as a relatively slow process of drip-feeding shares to employees.

• Management Buy-Out - an attractive option when an established business is now being run day-to-day by a management team and the owner(s) are relatively hands off and want to exit the business to fully retire.

EOTs

History

Nuttall Review of Employee Ownership resulted in a number of measures being implemented in Finance Act 2014. This included a relief to make it easier for retiring business owners to pass on the value of their business to employees (via an EOT).

Generally speaking, it tends to be considered that greater employee ownership is a good thing.

If you know one thing about EOTs… and CGT requirements

Firstly, it is not an exemption… it is a holdover relief.

This means that, as in Wonka’s case, where the shares are worth £10-15m, he is deemed to have sold them to the trustees at an amount equal to his base cost. So, if he has bootstrapped this company then this could easily be nil. As such, the trustees will acquire his base cost (of nil).

In order to get relief, we must meet a number of conditions.

• Trading requirement (TCGA 1992, s236I)
• All Employee Benefit Requirement (TCGA 1992, s236J) – which also includes an Equality Requirement
• Controlling Interest Requirement (TCGA 1992, s236T)
• Limited Participation Requirement

This last requirement is probably the most challenging. This requirement guards against a scenario where a vendor had a substantial shareholding and they and those connected with them make up a significant proportion of the workforce:

• Before the transaction; and
• After the transaction

Income tax requirements

Bonuses of up to £3,600 may be paid fee of income tax where certains condition apply

IHT

Should be no real IHT implications on the transfer in or on an ongoing basis.

Other

• Paying benefits

• Non-tax issues:
  • Financing the acquisition
  • Valuation
  • Trustees / Governance

At ETC Tax, we have advised numerous clients on tax-efficient methods of the sale of business to employees. Please get in touch if you would like to have a chat with us on this topic.