A new tax relief available from 6 April 2014 will provide full exemption from CGT on the sale of a controlling interest to an employee ownership trust.

The 2014 Finance Bill contains provisions allowing a sale to be treated as if there were no gain or loss, subject to the following principal conditions:

• The company must be a trading company or holding company of a trading group
• The sale must be an employee ownership trust which acquires a controlling interest in the company
• Any benefit conferred by the trust on the company’s employees must be on the “same terms”
• Trust beneficiaries may not include participators, ie holders of 5 per cent or more of the company (here, this includes anyone who has held 5 per cent in the previous ten years)
• For the 12 months following the disposal to the trust, at least 60 per cent of the company’s employees must not be individuals who are participators

Income tax-free bonuses

There is also to be a related new tax income tax relief, under which a company owned by such an employee ownership trust will be able to pay its employees annual bonuses (on the same terms) free of income tax (but still subject to national insurance), subject to a maximum of £3,600 per employee per year.

Comment

These new tax reliefs are intended to encourage more company owners to pass ownership to employees, and then to allow companies which are majority owned by an employee ownership trust, and so not able to pay dividends directly to employees, instead to pay income tax free bonuses.

They may make a sale to an employee ownership trust an attractive succession solution, particularly where there are few (or even no) trade buyers or where a high proportion of a company’s value lies in its employees.

A number of companies have already gone down this route prior to the new tax reliefs. A typical model is to establish an employee ownership trust which contracts to purchase an controlling interest, agreeing to pay for it over a period of years financed by future company cash flows which are gifted to the trust.

Robert Postlethwaite is a partner at UK200Group member firm Postlethwaite & Co, and member of the UK200Group Tax Panel.

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