This will be of particular interest to shareholders who may not benefit from business asset disposal relief (previously called entrepreneurs’ relief). In addition, there should also usually be 100 per cent relief from inheritance tax that would otherwise apply to transfers of shares.
For employees, the company may pay bonuses of up to £3,600 to each eligible employee per year, free from income tax. National insurance is still payable on these amounts.
It should be emphasised that the CGT relief is a deferral and if the qualifying conditions, particularly the 51 per cent ownership condition is failed, the gain is clawed back.
If the conditions are failed in the tax year of the original disposal or the following year, the deferred gain is taxable on the selling shareholders. If it happens after these two years, the Trustees are treated as selling and immediately reacquiring the shares at market value, thus crystallising a gain.
This is not all about tax reliefs of course. As Graeme Nuttall said in his follow-on report: “Employee ownership is when the employees of a business have both a meaningful ‘voice’ in how the business is run and a significant stake in the success of the business.”
It is important to consider how the employees will have a ‘voice’. There are no prescriptive rules for this. Typically, the governance structure will be as follows:
- The Trading Company will establish a subsidiary company to be the Trustee of the EOT.
- The Trust will be established.
- There will be some form of Employee Council, which will exist to discuss the progress of the business and other relevant issues. Many companies already have some form of employee forum in place.
- The Employee Council may have the right to appoint representatives to the board of the Trading Company. It may also have the right to appoint several directors to the Trust Company. The articles of each company will need to reflect these rights.
- It may also be considered appropriate for there to be an independent director of the Trust Company.
- Other directors to the Trust Company could be appointed by the Trading Company itself.
It is important to recognise that the different parties in this new structure may have different responsibilities. For example, the Trust Company has a fiduciary duty to the beneficiaries, being the employees.
The directors of the Trading Company have a fiduciary responsibility to that company as well as its shareholders.
There are potential conflicts and it would be unwise if the identity of the ‘trading board’ and the ‘trust board’ were identical.
