Could an Employee Ownership Trust (EOT) be your tax-efficient exit strategy?

You have built your business. Now you are considering what comes next.

Retirement? A new venture? Whatever the reason, one thing is certain, you want to exit your business in a way that is both smooth and tax-efficient.

Could an Employee Ownership Trust (EOT) be the solution?

What is an EOT, and how does it work?

Imagine selling your business to a trust created for the benefit of your employees.

Instead of a traditional buyer taking over, your employees indirectly hold the shares, ensuring the company’s legacy and culture remain intact.

When you sell a controlling interest (at least 51 per cent of shares) to an EOT:

• The trust holds the shares on behalf of the employees.
• The employees do not pay for the shares directly, instead, the sale is often financed by the business’s future profits.

It sounds straightforward, but recent updates in the 2024 Autumn Budget have tightened the rules, making compliance necessary for tax benefits.

What do the new rules mean for you?

To qualify for Capital Gains Tax (CGT) relief, you will need to meet some specific requirements:

• Fair market value – The sale must be made at a fair market value for your business.
• Trustee independence – At least half of the trustees must be independent of you. This means you, or anyone connected to you, cannot make up more than 50 per cent of the trustees.

Fail to meet these conditions, and you risk facing CGT up to four years after the sale a clawback you would probably rather avoid.

Are EOTs a tax-efficient exit option?

Let us consider why EOTs are becoming such a popular choice for business owners:

• CGT exemption – When you sell a controlling interest to an EOT, your gains can be entirely exempt from CGT, provided you meet the eligibility criteria. This means you keep the full value of your shares.
• Inheritance Tax benefits – Any assets transferred into the trust are excluded from your estate, reducing the burden of Inheritance Tax—particularly useful if you’re planning for retirement.
• Employee benefits – EOTs are not just advantageous for you; they’re great for your employees too. They can receive tax-free bonuses of up to £3,600 per year, fostering morale and loyalty.

Is an EOT right for you?

Do you want to exit your business while safeguarding its future and benefiting from tax efficiencies? If so, an EOT could be the perfect fit, but with stricter rules in place, proper planning is required.

Do you want to learn more about setting up an EOT and ensuring it is the right strategy for your business? Contact us for expert advice.