It is vital that firms engage the services of professional advisors when they start their Employee Ownership journey – not least an accountant.
There are some of the requirements of the relevant legislation an accountant will help with. In order to qualify for the Capital Gains Tax relief:
- The company must be a trading company, or the principal company of a trading group
- The Employee Ownership Trust must hold the controlling interest in the company
- Any benefit must be paid on the same terms to all eligible employees
- The number of continuing shareholders who are directors or employees, and people connected with them, must not exceed 40 percent of the total number of employees of the company or group
An accountant will seek clearance from HMRC that the 0 percent Capital Gains Tax rate applies to the intended transaction, and then the process for valuation is the same as it would be for an external buyer. But, as a non-adversarial sale, there is no lengthy due diligence process to go through.
Employees are not usually required to put funds into the Employee Ownership Trust (EOT), so it can sit alongside a share scheme where employees would have the option to invest.
An accountant can give expert advice on shares bonuses or dividends and how they can be distributed, and upon how hybrid structures might be used to suit particular types of companies. For example, a hybrid model often works for a family business – with 51 percent EOT and 49 percent in family ownership. The EOT structure is flexible and it is possible to combine an employee trust with a family trust or direct shareholdings.
Cleary, there are tax and National Insurance implications to be discussed around exits from EOT’s once they have been set up.
An accountant can give further guidance on this, and, importantly, on the financial planning needed to help you make the best use of any nest-egg raised from a disposal of the company.