Tax Bite – Tax free Company Disposals – Employee Ownership Trusts (“EOTS”)

By October 2014, the UK will have a very generous tax regime for companies and their shareholders wishing to give shares to their employees. This tax bite focusses on the less known new rules regarding EOTs. If a proprietor wishes to cede control of the company to an employee ownership trust (“EOT”), a disposal of a controlling shareholding interest (over 51%) will from 6 April 2014 be exempt from CGT and from October 2014 a company owned by such a trust is able to pay limited cash bonuses to all employees on a ‘same terms’ basis free from of income tax – but NOT NICs.

This means that provided finance can be obtained by the EOT a shareholder can (in the right commercial circumstances) dispose of his shares to the EOT with a nil tax charge.

From 6 April 2014, individual proprietors of a trading company (or holding company of a trading group) may secure complete exemption from CGT on a sale of shares to a special kind of employee ownership trust “EOT” provided that within that same tax year, the trust acquires a 51% controlling interest in the company. There are a number of conditions/requirements which must be satisfied to enable the relief to apply (the relief being claimed by the vendor). If the conditions are breached at any time, the trustees are treated as disposing of and immediately reacquiring the shares at their market value. In other words there is a “claw back” charge payable by the trustees and not the vendors. An outline of the conditions to secure the CGT exemption are as follows:

  • Of the shares acquired by the trust it must (to avoid any “claw back” charge) retain on an ongoing basis at least a 51% controlling interest in the company (“the controlling interest requirement”).
  • The trusts of the EOT must restrict the application of benefits at all times to a distribution on the same terms to all eligible employees (“the all employee benefit requirement”).
  • The number of continuing shareholders (and any other 5% participators) who are directors or employees (and any persons connected with such employees or directors) must not exceed 40% of the total number of employees in the company or group (“the limited participation test”). This test must be satisfied both throughout the year preceeding the disposal and at all times thereafter.

In addition, the EOT can waive its entitlement to dividends on the shares acquired without the 51% controlling interest requirement being infringed. A contribution of cash or other assets by a close company to an EOT to enable the trustees to buy the shares in the company is not a “transfer of value” for the purposes of inheritance tax. Likewise a gift of shares in the company by an individual to an EOT is an exempt transfer for inheritance tax purposes and a transfer or resettlement of shares from an existing employee’s trust to an EOT will not trigger an “exit charge”.

From 1 October 2014, cash bonuses of not more than £3,600 may be paid, to all qualifying eligible employees of a company owned and controlled by an EOT, free of income tax but not NICs. To qualify the bonus must not consist of regular salary or wages and must be awarded under a “scheme” which meets certain requirements. The company making the payment must be the employer company, and must meet the “trading requirement” test and the “indirect employee ownership requirement” throughout the 12 months ending with the date of the payment.

We will be discussing the benefits of various share incentive plans at our free upcoming seminar taking place on Monday 7th July 2014 from 1.30pm at the Marriott Hotel in Worsley (see here).  There are a limited number of spaces still available.  Please contact Yvonne Walsh on 0161 927 9277 or by email on Yvonne@forbesdawson.co.uk if you would like to book a place.

 

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