Employee Ownership – a new approach

A new form of indirect employee share ownership was enacted in this year’s Finance Act, under which shares in a company are retained in a trust (an Employee Ownership Trust “EOT”) for the benefit of the employees.

The main benefit to companies and employees is that, where a company is under the control of a qualifying EOT, bonus payments of up to £3,600 can be made to each employee without charges to income tax arising.

The other exciting element of the new rules is the reliefs that they confer on business owners when they sell shares to an EOT.  The transaction between the owner and the trustees is treated as taking place on a no gain/no loss basis.

The qualification criteria for the relief are somewhat complicated, but the essence is that a trust for the benefit of all of the employees, which provides rewards to employees on similar terms, needs to acquire a controlling interest in the company and the disposal of shares needs to mark an effective break between the vendor and the company.

It should be noted that the new rules do contain claw-back provisions – tax will become payable if, in the year after shares are sold, the company stops trading, the trust ceases to qualify as an EOT or if the work-force is thinned out leaving current or former shareholders representing more than two fifths of the employees and directors of the company.  The objective behind these claw-back provisions is to ensure that, as far as possible, transferors are genuinely giving up control of the company and leaving behind a viable company.

The combination of reliefs for transferors and for employees make this an interesting structure for both companies and their owners, providing a useful alternative for business owners who wish to exit, but see no third party purchaser coming forward within a reasonable time-scale.

For further information on employee ownership please call the TaxDesk on 0845 4900 509 and ask for Thomas Dalby.