Most limited companies will be eligible to sell, tax free, to an employee ownership trust. However, there are a number a conditions which do need to be reviewed and may exclude a small minority of companies. This article summarises those conditions.
The first requirement is that the company being sold to the employee ownership trust must be a trading company or the, “principle company” in a, “trading group.” While some analysis may be required for complex group companies, most of the time it is fairly apparent whether or not this requirement is met. A shop selling cakes: clearly trading. A holding company receiving passive income from rental properties: clearly not trading.
All-Employee Benefit Requirement
The reason the Government are offering such generous tax breaks is that they want to encourage employee ownership. As such what they expect in return is real employee ownership. Sales to trusts which only benefit the senior management team, or people above a certain salary, or who have been there for 20 years, etc. are not good enough. HMRC insist that all employees benefit, “on the same terms.”
When it comes to the meaning of, “the same terms” there is a bit of flexibility. HMRC will allow companies to vary payments in accordance with salary, length of service or hours worked. This allows, say, people who work full time in very demanding roles to receive a higher profit share than people who work part time in more junior positions. Where the company intend to adopt such a policy it is important advice is sought to ensure the distinctions made are reasonable and don’t offend the all employee benefit requirement.
Controlling Interest Requirement
There are companies out there where, say, 5% or 10% of the shares are owned by members of staff. Such companies might refer to themselves as, “employee owned” companies. However, when designing the employee ownership trust rules, the Government did not feel this was sufficient. They felt that to really call yourself employee owned the employees should own a majority of the shares in the company. As such, if a company owner wishes to sell to an Employee Ownership Trust they have to sell a majority stake in excess of 50%.
Limited Participation Requirement
Tax relief for selling to an employee ownership trust is very generous. As such the Government want to target that relief sensibly. They are not prepared to give relief where the company is almost entirely employee owned already.
Imagine a company with five employees. Four of them own 25% with just one junior member of staff as a non-shareholder. The Government consider that company employee owned already and as such it will not qualify for relief should it be sold to an EOT.
High level, the Government consider the limited participation requirement met so long as no more than 2/5ths of the employees are participators. Someone is a participator if they own, or have rights to acquire, at least 5% of the companies shares. People can also be participators in some other circumstances such as where the company owe them money or where they are, “connected” with a participator (i.e. a family member).
This requirement is likely to require analysis for smaller companies, with few employees or lots of shareholders.
This is essentially an, “only one bite of the cherry” rule. You can only get the CGT relief once. If you sell 100% of the shares to an EOT you get relief in full. However, if you sell 60% one year and 40% the next you only get relief on the 60%. All relief has to be claimed in one tax year.
The above is intended to be an initial overview only. While reasonably straightforward there are nuances and intricacies to the rules above that need to be considered. Here at The Peloton we are EOT specialists. If you have any doubts whatsoever about whether your company could qualify for tax relief upon sale to an EOT please don’t hesitate to get in touch at firstname.lastname@example.org or by calling our office on 01326 660022.