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How to sell your business without paying tax and how to pay tax free staff bonuses using Employee Ownership Trusts

There was some good news for the promotion of employee ownership in last month’s budget – the introduction of new legislation covering Employee Ownership Trusts. (EOT)

It enables a business owner to sell his business either free of tax, or for a 10% tax rate assuming the sale qualifies for Entrepreneurs’ Relief. It also allows for qualifying bonuses to be paid to staff tax free.

For the technically minded the rules are explained in Schedule 33 to the Finance Act 2014 but a quick guide to the new rules is set out below.

This is new and complicated legislation. There are several hoops to jump through to make sure that you comply with the legislation, but the tax benefits are excellent if this planning helps you achieve a tax efficient disposal of the business.

Capital Gains Tax Relief on Transfers of Shares
This applies where a business owner sells or gifts a controlling interest in his or her business to an Employee-Ownership Trust.

If the business owner elects, the disposal can be treated as a no gain / no loss disposal. This means that the owner does not pay tax on any gain.

The EOT then acquires the shares for Capital Gains tax purposes at the same value as originally paid by the seller of the shares.

If no election is made the gain should be taxed at 10% and the EOT would then enjoy a higher base cost for subsequent disposals.

There are several conditions that need careful consideration to qualify for the relief, this will be discussed in future articles.

Employment Income Exemption
Qualifying bonus payments will be exempt from income tax in the employees hands. This is where an EOT owns a trading company. The maximum tax free bonus is £3,600 a year.

Again there are complicated rules to consider that will be the subject of future articles.

There are also anti-avoidance measures to prevent such things as salary sacrifice arrangements.

The bonuses will still qualify for Corporation Tax Relief.

Please contact us if you would like to explore the EOT option in further depth.

 

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