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Purpose of this article
The purpose of this article is to explain:
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:
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:
Richer Sounds – high profile use of EOT
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
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
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:
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.