The tax benefits of selling a controlling stake in a trading company to an Employee Ownership Trusts are central to the UK Government’s plans to increase the number of employee-owned businesses in the UK. One of the most significant tax benefits, from the perspective of the exiting shareholder, relates to Capital Gains Tax.
Capital Gains Tax when selling a business
Capital Gains Tax (CGT) is a tax on the profits generated by selling an asset that has increased in value, such as shares in your business. If your shares have increased in value since you acquired them, and you sell your business to a third-party, via a trade sale, a private equity backed purchase or a management buy-out, you will need to pay CGT on the gain.
Profits from selling to an EOT are effectively exempt from Capital Gains Tax
When you sell your controlling stake in a business to your employees via an Employee Ownership Trust, you are effectively exempt from Capital Gains Tax. This makes an Employee Ownership Trust the most tax efficient way to sell your business, providing the correct conditions are met.
How much Capital Gains Tax would you normally have to pay?
The rate of Capital Gains Tax payable when selling shares in your business varies. However, the normal main CGT rate payable on a disposal of shares would be 20%, or 10% if Business Asset Disposal Relief (formerly Entrepreneurs’ Relief) applies. Therefore, a sale to an EOT can be extremely tax efficient compared to other more traditional exit routes.
Make sure you qualify for Capital Gains Tax exemption
For your business sale to qualify for the effective EOT Capital Gains Tax exemption, a few specific conditions must be met.
- The company must be a trading company or the holding company of a trading group.
- The EOT must be for the benefit of ALL employees (providing they are not and have not been within 10 years before the sale, 5% participators in the company).
- The EOT must have a controlling stake in the company following the acquisition.
- Shareholders with more than a 5% personal interest in the company, who are also employees, must not make up more than 40% of the total employees of the company.
- The EOT must benefit the employees on principally equal terms.
Is an Employee Ownership Trust the best exit strategy for you?
The Shorts Corporate Finance and Tax teams are specialists in helping shareholders sell their business, and we believe that, when appropriate, an EOT can be an effective and tax efficient way to sell your business. For advice that is tailored to you and your business, speak to the Shorts corporate finance team about EOTs today.