Entrepreneurs Relief

Employee Ownership Trusts

3 min read

Employee Ownership Trusts (“EOT”) were first introduced in 2014 to facilitate more businesses being wholly or partly owned by employees.

There are some generous tax breaks on offer to encourage business owners to consider the EOT model.

What actually is an EOT?

A trust is set up which will hold all or some of the shares in the company. In order to benefit from the tax breaks the trust must own more than 50% of the shares in the company.

The trust will be operated for the benefit of the employees of the company. The trust is run by its trustees, which could include members of the management team, but given that its purpose is to hold the directors to account, it should be sufficiently independent to enable it to do this. It is necessary to demonstrate to HM Revenue & Customs that control of the business has passed to the EOT and having the trustees dominated by the original shareholders /directors would make this very difficult.

Employee Ownership Trust Model

How does it work in practice?

For new businesses, the EOT model could be put in place from the outset. For existing businesses, the shareholders would sell all or some of their shares to the EOT.

An independent market rate valuation of the business should be obtained which would set the sale price of the shares.

The company would make a contribution to the trust enabling it to pay for the shares. Depending on the funds available, a loan may have to remain between the trust and sellers which would be repaid over a period of time as the company generates future profits.

It may be possible for the company /trust to raise finance to help pay for the shares over a shorter period. The original business owners, post disposal, are able to retain some ownership in the business, keep their posts as directors and also receive market rate remuneration packages.

The company will continue to be run by the management team on a day to day basis, although they will now be answerable to the trustees of the EOT.

Tax breaks

Shareholders are able to sell their shares to the EOT free of Capital Gains Tax. With the recent reduction in Entrepreneur’s Relief this is even more attractive.

Income tax free bonuses of up to £3,600 per year can be paid to each employee.

What are the benefits of an EOT?

There are a number of benefits for the different business stakeholders.

Existing Business Owners

  • Capital Gains Tax free
  • Ready and willing buyer for the business
  • Reassurance that the business will continue as a going concern
  • Able to retain some ownership in the business

Employees

  • Tax free bonuses
  • A sense of ownership

The Company

  • An engaged workforce
  • Ensured long term future
  • Can continue with minimal disruption
  • A more innovative and forward thinking culture

The employee ownership model may not be suitable for all businesses, but it is fast becoming a popular choice for businesses who recognise the value of their most important resource.

An EOT is just one type of employee ownership model and other options such as share schemes should also be considered.

If you have any questions, our team of expert Accountants would be happy to assist.

Disclaimer: Content posted is for informational & knowledge sharing purposes only, and is not intended to be a substitute for professional advice related to tax, finance or accounting. Each comment posted by third party readers/subscribers of our website on topics of tax and accounting is their personal opinion and due professional care should be taken by you before you act after reading the contents of that post. No warranty whatsoever is made that any of the posts are accurate and is not intended to provide, and should not be relied on for tax or accounting advice.

Budget Highlights

2 min read

Chancellor Rishi Sunak unveiled his first budget on 11 March 2020. Our summary focuses on the range of tax and financial measures which may affect you.

Entrepreneurs’ relief lifetime allowance reduced to £1m

It had been widely reported that the chancellor would abolish the generous relief where gains on certain qualifying shares and business assets are only taxed at 10%. Instead the lifetime limit on gains that can attract the relief has been reduced from £10M to £1M. In effect we have come full circle as Gordon Brown introduced the relief with a £1M limit in 2008.

Pension tapered annual allowance raised

The chancellor has raised the pension tapered annual allowance threshold in response to reports that senior medical NHS staff were restricting their hours due to large, and often unexpected, tax bills being incurred.

From 2020/21 the threshold income at which the tapered annual allowance needs to be considered is being raised from £110,000 to £200,000.

Many higher earners will now be able to take advantage of the full £40,000 annual allowance for pension contributions.

Various new measures in response to Coronavirus

New measures announced included the following:-

A £3,000 cash grant for businesses that qualify for small business rates relief

100% discount on business rates for retailers and businesses in the hospitality and leisure sectors where the rateable value of the property is less than £51,000

A dedicated helpline (0800 0159 559) for companies and self-employed individuals who are concerned about meeting tax payments due to the Coronavirus.

The government will repay statutory sick pay paid for absences due to the Coronavirus. The refund is available to employers with fewer than 250 employees and covers absences of up to 2 weeks.

Our comprehensive Budget Summary outlines the key measures, including some of the less-publicised changes that may impact upon your business or personal finances. For a detailed overview of the 2020 Budget information, please read our 2020 Budget Summary.

How we can help

For any help or assistance with areas of taxation, business growth or development please contact us for advice.

Disclaimer: Content posted is for informational & knowledge sharing purposes only, and is not intended to be a substitute for professional advice related to tax, finance or accounting. Each comment posted by third party readers/subscribers of our website on topics of tax and accounting is their personal opinion and due professional care should be taken by you before you act after reading the contents of that post. No warranty whatsoever is made that any of the posts are accurate and is not intended to provide, and should not be relied on for tax or accounting advice.

Investors’ Relief (IR)

1 min read

If you do not meet the criteria for Business Asset Disposal Relief (BADR) you may still be able to take advantage of the ow 10% rate of tax through IR.

Business Asset Disposal Relief (BADR) has been extended to external investors (other than certain employees or officers of the company) in unlisted trading companies. To qualify for the 10% CGT rate under ‘investors’ relief’ the following conditions need to be met:

  • shares must be newly issued and subscribed for by the individual for new consideration
  • be in an unlisted trading company, or an unlisted holding company of a trading group
  • have been issued by the company on or after 17 March 2016 and have been held for a period of three years from 6 April 2016
  • have been held continuously for a period of three years before disposal.

An individual’s qualifying gains for IR are subject to a lifetime cap of £10 million.

How we can help

We can advise as to the best course of action in your own particular circumstances. If IR35 does apply to you we can help with the necessary record keeping and calculations so please do contact us.

Enterprise Management Incentive Scheme (EMI) Options

3 min readAn Enterprise Management Incentive (“EMI”) scheme is an HMRC approved share option scheme aimed at smaller businesses to retain and motivates key employees. This guide will discuss what EMI schemes are and how they work.

So what is an EMI share options scheme ?

A share option gives the right to someone to purchase a share in a business at an agreed price at some point in the future.  Typically, but not necessarily, this would be at the point of sale. The option holder must be an employee of the company and must spend at least 75% of their working time at that company.


Why would you consider using an EMI scheme ?

EMI schemes are becoming more and more popular with businesses with HMRC reporting a marked increase in the number of business implementing the schemes during 2017.

The main reasons businesses consider introducing EMI schemes are to motivate and retain key members of their workforce.

Employees will have a sense of ownership and will also benefit from the increased value of the business.


Is an EMI scheme complicated to implement ?

At the outset there is a procedure that needs to be followed which is likely to require the assistance of professional advisors.
Outline of Procedure:

  • Prepare a market value valuation of the business and agree with HMRC
  • Agree the terms of the scheme and set out in an option agreement
  • Possibly minor amendments to the company’s Articles of Association
  • Grant the options to the employees and get them to sign the option agreement
  • Notify HMRC of the options that have been granted

Other than an annual declaration that has to be made to HM Revenue and Customs (HMRC) each year notifying them of any changes to the options that have been granted there is no on-going work required to maintain the scheme.

Much of the documentation that is mentioned above can be used for further granting of options at a later stage.  It may be necessary to obtain a further agreement from HMRC as to the value of the shares.


What are the Tax Advantages of EMI share options ?

EMI schemes have a number of tax advantages attached to them over unapproved share options.

  • Providing the options have an exercise price which was no less than the market value at the time of granting then there is no income tax or national insurance contributions payable.
  • Once the options have been exercised and sold then the employee will pay capital gains tax on any gain. The gain should qualify for Entrepreneurs Relief which will mean they will be taxed at a rate of 10%.  This is far less than if they were to pay income tax on the gain as they would do for unapproved options, which could be as much as 45% or possibly more if NICs were to become payable.
  • Key employees are likely to stay with the company as the probability of a profitable capital return, motivates them. Employee’s motivation and interests are aligned towards the shareholders and the board when they have a tangible interest in the company’s ownership. As a result, everyone is focused on adding more shareholder value.
  • Employees feel more valued in a share option scheme in the long term. Employees have an incentive to grow of the business and make themselves more accountable.


What will it cost me ?

Typically to implement an EMI scheme will cost around £2,500 to £3,000 plus VAT.  This may vary depending on how many employees are to be included in the scheme.


What are the downsides of an EMI scheme ?

If the trigger point for exercising the options is based around the sale of a business and the owner subsequently decides not to sell this can act as a demotivator for employees as the scheme may no longer be fit for purpose.

There are a number of disqualifying events laid down by HMRC which could affect the tax status of the scheme.  Whilst in most cases these may not be relevant, consideration needs to be given to them when making some business decisions.

The initial setup costs are high if options are only going to be granted to a small number of employees.

How we can help  ?

As an accounting firm, we are able to provide a wide range of services tailored to your particular industry. With over 40 years experience our team at Loucas has set up many EMI schemes for a variety of businesses in numerous business sectors. We have a dedicated team to ensure that you are guided though share option schemes with ease.

We believe by staying up to date with not only current but changing legislation and industry news we are better placed to help our clients and their businesses succeed.

If you would like to discuss you options with EMI share option schemes or how Loucas can assist you please do not hesitate to contact us.

Enterprise Management Incentive Scheme (EMI)

Further Information

The information contained in this publication has been prepared for general guidance and is not intended as advice. Whilst every care is taken to ensure the accuracy of the information, no responsibility can be accepted by Loucas for any loss resulting from acting or refraining from acting as a result of any material in this publication. The information in this publication is not designed as a substitute for seeking professional advice.

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