BUSINESS FOCUS T
hrough the use of Employee Share Ownership Plans (ESOPs), employees can acquire equity in a business in a tax efficient manner. No matter how small the equity, it encourages employees to begin thinking more like business owners working towards the firm’s long-term objectives.
For those looking to sell their business, employee ownership can be especially useful if shares are sold to an Employee Ownership Trust (EOT), which ensures the business is sold to people the owners know and trust.
Employee Ownership Trusts The idea of selling your business to somebody you are unfamiliar with or an individual you have competed against throughout your professional career can be difficult. In these situations, the EOT can help owners sell to their employees instead.
Importantly, a sale to an EOT is entirely free of Capital Gains Tax (CGT), which makes it a compelling choice for business owners as it provides them with the flexibility to exit on their own terms and with minimal disruption to ongoing operations.
By avoiding third-party negotiations, the sales process becomes much simpler to navigate and can lead to a more cost-effective sale. However, owners should be aware that it can take five to six years to be fully paid out as most of the funds are paid over a period of time from the company’s profits. Although the EOT trust becomes the majority shareholder, it delegates business as usual activities to the directors. This ensures little change in the management structure, unless it was specified by the owner before the sale, in line with a succession strategy. Annual Income Tax-free bonuses of up to £3,600 can be claimed by employees of an EOT-controlled business, although National Insurance Contributions (NICs) will still apply.
Employee Share Ownership There are various Employee Share Ownership Plans (ESOPs) available to business owners, each of which comes with its own unique set of benefits and tax advantages. The three most popular plans all deliver tax advantages, but before selecting one in particular, owners are encouraged to seek further advice on the tax treatment, as it can be difficult to understand upon first review. These three plans include:
Enterprise Management Incentive (EMI) – a discretionary share option scheme that provides a tax efficient and flexible way for smaller companies to reward some or all employees, by offering them the opportunity to buy shares in
12
MOULDING THE FUTURE VIA
EMPLOYEE OWNERSHIP Wider employee ownership helps businesses retain skilled individuals and recruit new talent, whilst boosting productivity and profitability, says John Dormer, Share Incentives Director at the RM2 Partnership.
the business in the future, at a price fixed when this offer is made.
The company must be independent, have gross assets not exceeding £30m and employ fewer than 250 people. Each employee may be granted options over shares with a value of up to £250,000 at grant date, with the overall company limit set at £3m.
The EMI options can be granted over different share types, with any exercise price and any performance conditions. The options can be exercised any time after grant, but will typically lapse 10 years after grant. Options are free of Income Tax and NICs, but gains will typically be subject to Capital Gains Tax (CGT), but thanks to the application of Business Assets Disposal Relief (BADR), it is usually levied at 10%.
Company Share Option Plan (CSOP) – another tax advantaged discretionary share option plan, for bigger or non-EMI qualifying businesses. It can be made available to all employees or a select few and tailored to meet business objectives through with different share classes and performance targets.
The individual option limit of £60,000 is less generous than with an EMI and options must be granted at market value. Although the
tax treatment is similar, participants may only exercise their options tax efficiently, three or more years after the grant date - BADR does not apply.
Share Incentive Plan (SIP) – this equitable, all employee share plan provides a potential zero tax rate, with no Income Tax, no NICs and no CGT. Shares can be gifted free of Income Tax and NICs to employees, who may also choose to buy ‘partnership’ shares out of their pre-tax salary, which may entitle them to receive a further two free ‘matching’ shares for each ‘partnership’ share they bought.
Seek legal advice…
Professional advice is vital to ensuring that not only is the right advice given, but it’s tailored to unique circumstances of the business. To start, owners will need to identify the participants, consider how much equity to use and think about how they deal with leavers. All employee share plans must comply with the relevant legislation, be registered with HMRC; annual returns must also be submitted. Failure to comply could result in fines and the removal of tax advantages, which makes advice from employee ownership specialists critical. BMJ
www.buildersmerchantsjournal.net August 2023
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32 |
Page 33 |
Page 34 |
Page 35 |
Page 36 |
Page 37 |
Page 38 |
Page 39 |
Page 40 |
Page 41 |
Page 42 |
Page 43 |
Page 44
