Employee Ownership Trusts
Many owners of successful private companies have no one in their family able or willing to succeed them. This makes realising a capital gain in recognition of their success less easy to achieve. A possible solution is an Employee Ownership Trust. The employee ownership sector includes large names such as John Lewis Partnership but can be applied to smaller businesses too.
How does it work?
Over a number of years the company makes a donation to the trustee of a trust set up for the employees. Eventually the Trust buys all of the owner’s shares. In this way the company becomes 100% employee owned but the employees never directly own any of the shares. The shares are retained by the Trust. The Trust benefits the employees by paying bonuses from the employing company rather than dividends to owners.
New Capital Gains Tax exemption for seller
If a controlling interest is sold to an employee ownership trust there is a complete exemption from Capital Gains Tax. Hence an owner escapes tax on the proceeds of the sale. In addition the sale proceeds can be paid by instalments. There are further qualifying conditions to qualify for the exemption which can be discussed if this is of interest.
Ongoing tax exemptions for employees
In broad terms some bonus payments made to employees of the company where an employee ownership trust controls the company are exempt from tax (but not national insurance). This applies to bonus payments up to £3,600 per tax year paid to all employees with more than one year’s service and paid on the same terms. The company will have discretion to set the bonus level by reference to service, hours or salary. There cannot be any arrangement to sacrifice salary for the bonus.