The following are possible advantages of employee share ownership trusts:
• The trustee can acquire shares from the owner with borrowings, thus the owner realises the value of his investment without recourse to an external buyer;
• The borrowings can be repaid out of contributions by the company to the trust which are tax deductible for the company;
• The trustee will then hold shares that can be awarded to the employees in line with the company’s remuneration policy;
• The trust arrangement can create an internal market for the shares, where employees can sell their shares if they so wish;
• Share awards can be made with vesting restrictions designed to incentivise and retain staff.
In this sort of arrangement, the trustee holds shares in the company for the benefit of its employees. Business owners should take legal and tax advice on the implications of this before setting up such an arrangement.
Finance Act 2014
The UK Finance Act 2014 introduced tax incentives for business owners who divest of their shares to their employees.
Broadly speaking, a business owner who transfers the majority stake in the business to an Employee Ownership Trust for the benefit of its employees can realise the value of the shares transferred without incurring a liability to capital gains tax. As an additional incentive, the company can then pay bonuses of up to £3,600 per employee annually free from income tax.
Each business owner should take tax advice prior to establishing an Employee Ownership Trust, as there are multiple criteria and commitments; however, this can be a favourable option for many looking to divest or make succession plans.
The Choice of Trustee
The trustee plays a crucial role in ensuring that the employer’s and employees’ needs are met and in managing and administering the share scheme, including with relation to tax compliance and managing the tax position under the complex rules applicable to payments to employees made by third parties. As such, the appointment of a professional trustee is recommended. The trustee should have experience of holding assets for the benefit of others and ideally be regulated by a sound supervisory body.
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