Available tax reliefs
Many business owners qualify for “entrepreneurs’ relief” from capital gains tax (CGT), which currently gives a 10% rate of tax on the first £10m of sale proceeds. If a sale is to an EOT, however, the tax relief is even more generous as no tax is paid by the seller. Instead, for tax purposes the EOT is deemed to acquire the shares at the original cost of the seller. In addition:
- if the seller decides to part sell and part gift the business to the EOT, a separate relief is available from any inheritance tax on the gift element; and
- there are income tax reliefs available for bonuses paid by companies owned by EOTs.
To qualify for the tax reliefs a number of criteria must be met. These include:
- the business must be carrying on a trade (so can’t be an investment business) and must continue to trade until at least the end of the tax year of the sale;
- the EOT must acquire and continue to hold a controlling interest (+50%) of the business;
- sellers who retain 5% of more of the shares must not exceed 2/5ths of the total workforce;
- all eligible employees must benefit (with limited exceptions) and the EOT’s assets must be used to benefit all such employees equally – although benefits can be determined to a certain extent by applying objective factors such as length of service, amount of remuneration and hours worked;
- for income tax relief on bonuses, in addition to the above criteria, the bonus must not be a substitute for salary, must not exceed £3600 per year per individual, and directors must not represent more than 2/5ths of the work force.
(Please note the above is a broad summary of the rules as at 1 January 2020 – the rules are detailed and require careful consideration in each case to ensure qualification)