Employee Share Ownership Trusts
Selling your business with complete exemption from capital gains tax seems an unlikely scenario. This is however possible where you sell your shares to an employee ownership trust where statute provides that no capital gain arises.
The Government’s objective is to promote employee ownership. The main requirement is for the trust to acquire more than 50% of the shares.
Apart from complete capital gains tax exemption for the vendor, there is an income tax benefit to employees as they can each receive tax free bonuses of up to £3,600 per tax year from the company.
Many sales of private companies are, in part at least, financed by the company itself over a period of years. This is the financing model which will generally be adopted in a sale to an employee ownership trust. If the company has surplus cash at the date of sale then it can make a contribution of this to the trust and the trustees can use the funds received to pay to the vendor shareholders. The balance of consideration due to the vendors can remain outstanding with the vendors receiving payment over a number of years. Each year, the company can make further contributions to the trust which will utilise these funds to pay down the loan.
Ray owns the entire issued share capital of a trading company and, at 55 is looking to succession and realising some value from the company. He has thought for a number of years that he would like to get his loyal employees involved in the company and perhaps offer them the opportunity of effecting a management buyout. Ray is not ready to retire yet but anticipates handing over some of the duties which he currently carries out to senior staff over the next five years or so and thereafter he will decide whether to retire completely.
The company has built up a significant amount of surplus cash from trading profits over the years.
Ray decides to consult with the company employees and following these discussions an employee ownership trust is set up. The company makes a substantial cash contribution to the trust which utilises these funds, together with funds borrowed from its bankers, to purchase a 51% shareholding in the company from Ray.
The qualifying conditions are met and Ray realises a significant capital gain on which he pays no capital gains tax.
In future years, the company makes further contributions to the trust from its profits after tax which the trust utilises in paying down the bank loan.
In five years, there is a lot of flexibility in what happens next. For example, both Ray and the trustees could sell their shareholdings to a trade purchaser.
Read our latest Employee Share Trust blog here.
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