Are you planning on selling all or some of your shares to an Employee Ownership Trust? Our Employee Ownership team answers five frequently asked questions:
#1 – Do I have to sell all my shares to an Employee Ownership Trust (EOT)?
No. Some EOTs start by acquiring a modest shareholding, perhaps as little as 10% of the overall shareholding to give the employees a tangible stake in the business. This will not meet the tax incentive criteria for no CGT or income tax free dividends which requires over 50% to transfer to the EOT, but it does create an initial Employee Ownership stake for the employees and can set the business on the journey to full employee ownership.
#2 – Why might I hold back some shares on a sale to an EOT?
There are a number of perfectly sound reasons. You might feel that the company is growing rapidly and while you are not ready to let go altogether, you do want the employees to share in the growth of the company. Or you may have family members actively involved in the business and that legacy needs to be recognised.
Some founders have retained shareholdings to give reassurance to customers that they are still part of the operation. And some shares might be allocated to management to specifically incentivise management drive to grow the business.
#3 – Can shares be transferred to family members or a Trust?
Yes. In forming an EOT some shares might be handed to the next generation or into a family trust. Provisions in the articles of the company can allow for such transfers to be made without any consent being required.
#4 – Can we use direct ownership of shares and share schemes alongside an Employee Ownership Trust?
Yes. It’s not unusual for senior managers to be offered share options, like EMI schemes, to assist in the drive for enhanced growth in the business. If the option is exercised, the individuals can hold shares personally, which could then form the basis of a retirement payment by selling the shares to the EOT at the appropriate time. Similarly, direct shares can be made available to employees through a Share Incentive Plans (SIP) scheme. It’s important to ensure that the Employee Ownership Trust never holds less than 50% of the shares, but otherwise there’s great flexibility availability similar to any other company.
#5 – If I hold back shares can I sell them later to the EOT?
Yes, and founders may do this on final retirement.
The Employee Ownership Trust is a natural purchaser of the shares at market value. Be aware that the zero CGT is only available in the year that the majority of the shares are sold to the EOT, but Entrepreneur’s Relief may apply in any event as this will not have been affected by the original sale of shares to the EOT.
If you would like to learn more about Employee Ownership and how it could benefit your business, please get in touch. We offer a one-stop service in partnership with BoardroomAdvisors.co.uk that helps companies make the transition to EO.