Unlocking the Potential of Employee Ownership Trusts
If you’re a business owner considering your exit strategy, Employee Ownership Trusts (EOTs) could be the perfect solution. Introduced by the UK government in 2014, EOTs provide a win-win structure for business owners and employees alike. Let’s explore why selling your business to an EOT is such a fantastic option.
Tax-Free Profits for Sellers
Selling your business to an EOT comes with an extraordinary benefit: zero capital gains tax (CGT) on the sale proceeds. Compare that to the usual CGT rate of 10% to 20% (or 14% with Business Asset Disposal Relief on sales up to £1 million), and it’s clear why this route is so attractive. For example, if your business is worth £5 million, the CGT saving could amount to £1 million – a life-changing figure for many entrepreneurs.
Continue Your Legacy
One major advantage of EOTs is that you don’t need to step away immediately. You can stay involved as a managing director, continuing to guide and oversee the company. This ensures a smoother transition and stability for the business. What’s more, you can maintain a sense of security by having a legal charge over your assets, giving you peace of mind about the deferred consideration.
Enjoy Interest on Deferred Payments
If the EOT doesn’t pay you the full value of your business upfront, you can receive deferred payments – with interest. Better still, this interest is deductible for corporation tax, making it a cost-efficient arrangement for the company.
Benefits for Employees
Selling to an EOT doesn’t just benefit the owner – it’s a game-changer for employees too. Here’s how:
• Tax-Free Bonuses: The company can pay employees up to £3,600 annually, tax-free. This bonus is a fantastic perk, boosting morale and financial wellbeing.
• Job Security: With ownership transferred to the employees, the company is less likely to be sold to an external buyer or face drastic changes. This secures jobs and fosters a culture of loyalty.
• A Voice in the Company: Employees often feel more empowered in a business they partly own, enhancing engagement and productivity.
Control Without Compromise
Although the EOT becomes the majority owner of the company, its structure allows you to retain significant influence during the transition period. The EOT must act in the best interests of the employees, but your expertise and experience are invaluable as the company adjusts to the new ownership model.
Why Choose an EOT?
The benefits of EOTs are vast:
• Financial Savings: Both owners and employees benefit from tax advantages.
• Legacy Preservation: Your business continues to thrive under a model you’ve built.
• Employee Engagement: A more motivated workforce leads to higher productivity and stability.
How to Get Started
Transitioning to an EOT involves careful planning and advice from financial and legal professionals. With the right guidance, the process can be smooth and rewarding. Recent updates to the EOT framework have clarified tax rules and strengthened protections for employees, making this option even more appealing .
Final Thoughts
An EOT is more than just a tax-saving tool – it’s a way to secure your legacy, reward your employees, and ensure your business thrives for years to come. If you’re looking to make your exit strategy a meaningful one, an EOT could be the perfect fit.