The recent 2013 Autumn Statement by the Chancellor announced a new way for business owners to sell their companies free of all taxes.
At present, most people selling business assets will qualify for a tax rate of only 10% if they qualify for Entrepreneurs Relief. It is usually quite easy to qualify for this preferential 10% rate if you are selling outright. But anyone wanting to pass ownership in a gradual way to employees or family members has until now found it much harder to benefit from this very generous tax rate. K&H’s ISOP (Income & Share Ownership Planning) service was developed in part to provide a way to give such business owners access to the 10% tax rate using careful structuring of the shares and/or setting up a new company to acquire the existing owners shares.
The new rules announced last week and applying from April 2014 should make access to favourable tax rates much easier for business owners who are passing a controlling interest to their employees. What’s more, the tax rate will be 0%, so even more generous than the 10% available to date!
This is subject to certain conditions (of course…) and full details are not yet to hand at the time of writing, but broadly, to qualify for the tax exemption, you must:
1. Make the disposal of your shares to qualifying employee ownership trust (EOT)
2. The EOT must not at any time before the start of the tax year in which the disposal occurs have a controlling interest in the company
3. The EOT must have a controlling interest in the company at the end of the tax year
4. The company (or its group) is trading and continues to do so until the end of the tax year
5. Neither the transferor nor a person connected with him has in a previous tax year disposed of shares in the company or a group company
6. Either the transferor must not at any time in the previous 12 months be a “substantial participator” (broadly, a person with an interest in at least 5% of the company) or fewer than two- fifths of the employees and officeholders in the company must be “substantial participators” immediately after the disposal
The relief operates as if the disposal is made for an amount which gives neither a gain nor a loss to the transferor. If the EOT ceases to control the company or ceases to be a qualifying trust, the EOT trustees will be deemed to have disposed of and reacquired the shares at the then market value and gains realised on such deemed disposal will be chargeable to CGT.
There are other tax incentives for EOT controlled companies and their employees, as summarised in Andy Scott’s recent Autumn Statement blog post, including IHT concessions and tax free (but not NI free) payments to employees of up to £3,600 a year.
The reason for this is that the government wants to encourage employees to become part-owners of the companies that they work for. This has been the government’s stated position for some time now, and it is good to see that they are willing to put their money where their mouth is by offering these tax incentives. Also, the fact that all the main political parties seem to be in favour of employee ownership means that a change of government after the election in 18 months should not cause any sort of reversal of these new rules.
The politicians, as well as business gurus and economists, seem united in the view that employee ownership improves productivity and happiness in the workforce – the “John Lewis effect”, as the media has dubbed it.
I think that these tax incentives are great news for the economy and for our ISOP clients – present and future. At K&H we have already started revising our plans for expanding our employee ownership scheme and setting ourselves ambitious targets for 2014 and beyond, with the help of the Growth Accelerator Programme, through which we can access grants to help our business development for the benefit of all of the team here.
If you have any thoughts to share about the new tax rules or employee ownership generally, please post a comment below or let me know if you have any questions that we can help you with.