How can employee ownership trusts help to secure the legacy of your business?

12 January 2023

Services:

Personal Tax Planning,

Corporate Tax Planning

After a tumultuous few years, it’s unsurprising that many business owners are starting to turn their attention to their succession plans.

And securing a robust legacy for the business high up on the agenda for most. With this in mind, it’s vital to consider all options available to you and your organisation.

Whilst management buyouts, trade sales and asset sales are all conventional exit strategies, employee ownership trusts (EOTs) have far-reaching benefits and are becoming a popular means of succession planning.

So, could an EOT be the means of securing the legacy of your business?

What is an Employee Ownership Trust?

Employee Ownership Trusts are one of the fastest growing business in the UK, with the number having doubled between 2020 and 2022.

An EOT is an employee benefit trust which gives your team indirect ownership of the business. 

Amongst other advantages, such as attracting and retaining talent, EOTs have significant succession planning benefits.

The tax benefits…

There are big Capital Gains Tax (CGT) changes ahead this year. The tax-free allowance is being lowered from £12,300 to £6,000 as of April 2023, and will then be halved again next year.

Whilst the regime will help to claw back some of the financial repercussions of the pandemic. But it will also have a big knock-on effect for those who use the allowance.

For those who are now liable to the tax, EOTs could be even more valuable. Especially with the lower rate of Business Asset Disposal (BADR) relief at 10% up to £1m, instead of the former £10m threshold.

If structured correctly, employee ownership trusts will not incur CGT liability upon sale. This is a huge advantage of the model, especially to the extra owner managers who will become liable to CGT in a few months time.

No funds needed from your team

Management Buyouts (MBOs) are a popular exit route for many business owners. They offer a level of security, ensuring the organisation will continue in the hands of a team that owner already knows and trusts. 

However, one of the main sticking points of MBOs is that they require significant financial investment from your management team. And during these economically uncertain times, this isn’t always feasible.

Unlike MBOs, EOTs allow your team to buy your business indirectly. The shareholders will sell their shares to the trust, which will fund the sale. This will create a debt owed by the Trustee company to the exiting shareholders. The business can make capital contributions to make an initial payment, but will need to continue generating annual trading profits to make contributions to the EOT. These contributions will then be used to repay the outstanding purchase price that it owes to the shareholders.

 A smoother succession process

It’s no secret that succession planning takes time. In an ideal world, the planning process will start to take form 3-5 years before the owner’s eventual exit. Because EOTs do not involve third party buyers and have far fewer due diligence requirements, the process of transition and eventual exit can be much more smooth.

Another huge transition process bonus is that unlike a conventional sale, you won’t need to disclose any of your confidential information to competitors or buyers when moving to EOT. 

Whilst the process is free from third parties when it comes to succession, we would always recommend consulting your legal and financial advisors before transitioning to an EOT. The process can be complex and it’s crucial to get the structure of the trust right, to reap the rewards that they have to offer.

Supporting you with your succession plans

 Setting up an employee ownership trust is no easy task, and is a complicated area of task. And whilst completely restructuring your business might seem daunting, there’s no need to navigate your way through alone.

Our team of tax experts can support you every step of the way. From discussing the pros and cons of EOTs, cash flow modelling and finding the right legal advisors, all the way through to supporting you with the actual transition.

Whether an EOT is the right route for you, or if another strategy is a better fit for your business, our team are on hand to support you as you plan the legacy of your business.

 


 

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