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Retirement planning isn’t always at the forefront of a business owner’s mind, but when it is, questions around tax implications and how to exit the business will usually keep you at your desk longer than you want.

Often, there is fear around the whole sale process – in talking to the ‘outside world’ about your business, of not finding a buyer, paying too much tax, and having to tell your staff that you have sold.

But have you considered there may be an alternative?

Retailer John Lewis led the way with Employee Ownership Trusts (EOT) but more recently, smaller businesses have adopted the employee ownership model and taken the opportunity to create a legacy by selling all or part of their trading business to their employees.

EOTs were introduced by the government in September 2014 with the aim of facilitating wider employee ownership, albeit by an indirect holding. For a business owner, it can be a great way to withdraw from day-to-day management of the company, while maintaining some interest as you move towards retirement – and it comes with generous tax breaks too, thanks to the government wanting to encourage shareholders to move to an employee ownership model.

We’re seeing a marked increase in interest in using EOTs as a viable exit option for business owners. They are far less intrusive than a sale to a stranger or trade buyer; far easier to promote to staff and very motivational for them; far less onerous as a sale process as the business has a ready-made buyer; and less tax to pay on the consideration.

An EOT enables a business owner to exit a business fully or partially at full market value (an independent valuation will be required). And most importantly, no capital gains, income or inheritance tax liabilities are due on the disposal of a controlling interest (a controlling interest being a sale of 51% or more of the share capital) in a company to an EOT if undertaken in accordance with the key qualifying conditions to be met at the outset. These would be reviewed prior to any process being started.

Another benefit is that afterwards qualifying employees can be paid annual bonuses of up to £3,600 free of income tax. Bonuses above this amount would be fully taxable.

Funding can come from contributions from the company itself. The price can be paid over a period of time, as there is no requirement for it to be fully paid at completion of the transaction. These contributions will be met from the company’s post-tax profits.

There is potential to fund all or part of the purchase by way of a loan from a commercial lender, which could reduce the time the selling shareholders have to wait to receive all of the sale proceeds.

Senior management can also be incentivised as it is possible to make use of share schemes, such as enterprise management incentives (EMI) in the process.

We project-manage the transaction from start to finish, liaising with other professionals and secure HMRC clearance for the proposed transaction, so we can confidently advise business owners on the full tax implications of the structure.

In starting the EOT process, we seek to understand the business owner’s aspirations. We review the business structure, consider the strength of the ongoing management and then work with the owner and the management board to plan the process.

If you own a business and are considering retiring, then have a coffee with us here at McBrides to find out the implications of exiting your business through an EOT.

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McBrides Chartered Accountants