Employee Ownership Trust Tax Benefits

4 March 2021 Andy Ryder View all News

An Employee Ownership Trust is a business ownership model which allows a company’s employees to own a controlling stake in the company. This model brings several benefits for the employees, the exiting or selling shareholders, and the company itself.

The UK Government greatly supports Employee Ownership Trusts after having introduced them in 2014 and offers generous tax incentives to existing company shareholders who make the transition to employee ownership.

Capital Gains Tax exemption

If a shareholder sells their shares of a trading company to an Employee Ownership Trust, resulting in the EOT having a controlling interest in the company (over 50%), the sellers will benefit from an effective rate of 0% Capital Gains Tax. Capital Gains Tax would be payable on other types of business sale, such as management buyouts or trade sales.

Income Tax Free Bonuses for employees

One of the key requirements of an Employee Ownership Trust is that it is for the benefit of all employees.

That is why qualifying employees of companies owned by an Employee Ownership Trust are entitled to tax-free cash bonuses of up to £3,600. This amount is free from Income Tax, but not National Insurance.

This not only incentivises existing employees to succeed but will also help attract the very best talent in your industry or sector.

Inheritance Tax and Employee Ownership Trusts

If a shareholder disposes of their shares through an Employee Ownership Trust, this will not be a chargeable transfer for Inheritance Tax. Like all tax benefits associated with an EOT, certain conditions must be met to qualify for the relief.

The Employee Ownership Trust may also benefit from relief from Inheritance Tax principal charges and exit charges.

Make sure your company qualifies for EOT tax benefits.

There are several specific and stringent requirements that the company will need to meet for the tax benefits mentioned in this article.

  • The Employee Ownership Trust must be for the benefit of all employees, subject to certain exclusions.
  • A controlling interest of more than 50% of assets, voting rights and share capital must be transferred to the EOT. In short, the EOT must become the majority shareholder.
  • The company must be actively trading at the time of shares disposal or be the holding company of a trading group.
  • Shareholders with more than a 5% personal interest in the company, who are also employees or directors, must not make up more than 40% of the total employees of the company.
  • The EOT must benefit employees on principally equal terms, such as when paying bonuses. Relative remuneration hours worked, or years’ service, can be applied to differentiate between employees.

Find out more about Employee Ownership Trusts

For more detailed advice, tailored to your own company and shares, get in touch with the SHORTS corporation finance team who are more than happy to help.

You can also read one of the following guides if you are interested in learning about EOTs in more detail.

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