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Introduction

While we don’t think anyone should consider selling to an employee ownership trust (EOT) purely for the tax breaks, they certainly sweeten the deal! In this article, we’ll consider the two main tax reliefs available when a company is transferred to Employee Ownership.

Capital Gains Tax Relief

Ordinarily where a limited company is sold Capital Gains Tax is payable on sale. To explore how this works, let’s consider the scenario below:

Jane owns 100% of the shares in Robusta Revolutionaries Ltd. Jane sells to a third party for £2,012,300. The tax is calculated as follows:

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Jane therefore loses a massive £300,000 in tax!

By contrast, were Jane to sell to an Employee Ownership Trust she would pay no Capital Gains Tax whatsoever. The is per section 236H of the Taxation of Chargeable Gains Act 1992 which is designed to incentivise business owners to consider employee ownership as a viable alternative to trade sales. 

Key Takeaway: The tax savings from an EOT mean that a business owner can make more money selling to an EOT than a traditional third party sale.

Tax-Free Bonuses

The second big incentive is that companies owned by an employee ownership trust can pay up to £3,600 to each member of staff, each year, tax-free. What this means in real terms is that it is cheaper for employee-owned businesses to remunerate staff, providing them with a competitive advantage over non-employee-owned companies. To see what that looks like, let’s have a look at the table below:

As you can see, £3,600 tax-free paid from an EOT is equivalent to a £6,730 bonus from a regular company for an additional rate taxpayer – both result in £3,483 of net pay in the employee’s bank account. It also costs a regular company £2,917.27 more to make such a payment, relative to an employee-owned one.

Key Takeaway: Employee-owned businesses can reward staff more cheaply than other businesses, helping with incentivisation and retention.

Conclusion

If you are considering exploring an Employee Ownership Trust for your own company please do not hesitate to contact us at tax@thepeloton.co.uk or by calling our office on 01326 660022. We are able to offer comprehensive support from a legal, tax, accounting and cultural perspective. Having gone through it ourselves, we’re perfectly placed to help.