Employee ownership trusts – an overview

Author

Andy Wood

Andy is a practical, creative tax adviser who assists a variety of clients in achieving their personal and commercial objectives in the most tax efficient manner.

Employee ownership trusts

Purpose of this article

The purpose of this article is to explain:

  • the history of the employee ownership trust
  • The perceived benefits of employee ownership
  • an overview of the generous tax reliefs available for qualifying employee ownership trusts (EOT)

History of the Employee Ownership Trust (“EOT”)

The EOT tax reliefs have their origin in a political desire to introduce more diversity into the UK economy by encouraging employee ownership.

In 2012, the government commissioned a review of employee ownership (Nuttall Review). Among other suggestions, the Nuttall Review recommended a capital gains tax (CGT) relief for owners of businesses who sell their shares to their employees.

As a consequence of the Nuttall Review’s recommendations, the Finance Act 2014 introduced certain tax reliefs relating to companies owned by an EOT, and to individuals who sell a controlling interest to an EOT. An EOT is a collective vehicle which purchases a controlling interest in a company and holds it on behalf of the employees as a whole.

For more information about the Nuttall Review, see:

 

Attractions of Employee Ownership

It is stated that employee ownership provides benefits to:

  1. the individual business that is employee owned; and
  2. the wider economy

The Employee Ownership Association has said the following about these perceived benefits

 

Benefits for the business?

“The employee owned business sector in the UK is growing because co-owned companies tend to be more successful, competitive, profitable and sustainable.

Because they’re co-owners, staff in employee owned businesses tend to be more entrepreneurial and committed to the company and its success.

Because they have high employment standards, involve staff and give everyone a stake, employee owned businesses are better at recruiting and retaining talented, committed staff.

Because they’re run in an open way, employee owned businesses tend to have a strong commitment to corporate social responsibility and involvement with the communities they operate in.

Independent research suggests that a combination of shared ownership and employee participation delivers superior business performance.

Employee owned companies are more innovative because managers go out of their way to consult, share information about the company, and give staff responsibility.”

Employee Ownership Association

 

Benefits for the economy?

 

Successive Governments have promoted employee ownership because they recognise its potential contribution to the economy. A range of factors combine to make employee owned businesses an asset to the UK economy:

Independent research suggests that a combination of shared ownership and employee participation delivers superior business performance.

The employee owned business sector adds to the diversity of Britain’s economy by offering a vibrant and different model for achieving business success.

Companies which are employee owned, or who have large and significant employee ownership stakes, now contribute £30 billion to GDP.

The sector is growing because employee ownership is proving to be a durable, successful business model that’s extremely well suited to the challenges of 21st century management.

 

Some examples of employee ownership

Some examples of employee ownership can be found on the Employee Ownership Associations’ website.

However, one should note that:

  • this research is quite old; and
  • Employee ownership does not necessarily mean that these companies use an EO

Richer Sounds – high profile use of EOT

  • A successful network of Hi-Fi and TV stores;
  • founded aged 19 by Julian Richer (JR”), just over four decades ago;
  • turns over almost £200 million a year;
  • JR decided to transfer 60 per cent of his shares in the firm into an Employee Ownership Trust;
  • Wanted to reward “loyal, hardworking colleagues” as well as guaranteeing the chain’s future prosperity and avoid its socially-progressive approach being changed by an “aggressive” outside investor

For more information, see our article on this.

What is an EOT?

It is first worth noting that an EOT is a type of employee benefit trust or EBT.

Of course, EBTs carry a lot of negative baggage for the role they played in corporation tax and PAYE planning. However, an EBT always was, and remains, a legitimate device to hold shares for the benefit of employees.

 

 

Overview of tax issues

 

Background

As you might have realised, the disposal to the trustees is an event for CGT purposes.

Usually you would be looking towards general reliefs such as Entrepreneurs’ Relief or Holdover relief.

In addition, if the shares were sold at undervalue then, as well as the CGT issues, we’d also need to think about Inheritance Tax (“IHT”) as there would be a transfer of value.

 

General reliefs for transfers in to EBTs

  • CGT: a form of holdover relief is available where trustees hold a controlling interest after the transfer of shares under TCGA 1992, s239; and
  • IHT: Relief on transfers into and from EBTs under IHTA 1984, ss13, 28, and 75

 

However, aside from the tax reliefs that apply for general transfers in to EBTs, a qualifying EOT will be provided with additional reliefs.

EOTs – 3 key tax reliefs

Where the qualifying conditions are satisfied:

  • CGT relief:
    1. for a disposal of shares to an EOT (TCGA 1992, ss236H-236U)
    2. More generous than that which applies generally to EBTs – but tighter conditions.
  • Income tax:
    1. An (small) exemption from income tax
    2. on bonus payments of up to £3,600 per year paid to employees of EOTS (where such bonuses paid by EOTs employers
    3. ITEPA 2003, ss 312A-312I;

 

  • IHT:
    1. Relief on transfers into and from EOTs
    2. IHTA 1984, ss13A28A and 75A
    3. applies on or after 6 April 2014.

More detail is provided on the tax reliefs in our separate articles on each.

 

If you have any queries about Employee Ownership Trusts, or employee ownership generally, then please do get in touch.

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