If you are considering selling your business to your employees through an Employee Ownership Trust, you may already be aware of the generous tax benefits the exit strategy offers. While they are certainly not the only reason to consider an EOT - the IHT implications are worth further consideration.
When the UK government introduced Employee Ownership Trusts in 2014, they wanted to give both exiting shareholders, as well as the business itself, a real tangible incentive to make the transition to employee ownership.
These incentives include exemption from Capital Gains Tax for the selling shareholder, as well as tax free annual bonuses of up to £3,600 for employees. But there is also a potential IHT benefit of the EOT exit route.
EOTs can have Inheritance Tax (IHT) benefits
The sale of shares to a trust at less than market value can result in immediate IHT liabilities arising for the seller; however, there is an exemption from these liabilities where the sale of shares at undervalue is to a qualifying EOT.
This means inheritance tax is one less thing to worry about when selling your business to an EOT.
In addition, as the EOT is for the benefit of all employees, the EOT is generally excluded from the 10-year IHT charge, as well as IHT exit charges, that can arise on certain trust arrangements.
When implementing any trust arrangement, it is important to seek advice to ensure that no undesirable tax consequences arise.
Is an EOT right for your business?
For a detailed summary of all aspects of an EOT transaction, you are welcome to download our free EOT guide. It includes information on planning, funding, tax and other practical considerations. Please remember, an EOT may not be the right choice for every business, but you can find out for your own business by consulting the guide.
Tags: EOT
