EOTs – Where does the money come from?

Selling to an Employee Ownership Trust (EOT) is an ever popular method of disposing of your shares in a tax efficient way, whilst also providing your employees with a greater level of involvement in the company than they currently enjoy. If an EOT is implemented in accordance with the requirements under the current tax rules, 100% CGT relief is available to selling shareholders. You might think that selling your shares in a company and paying no CGT is too good to be true, the main question on your mind is likely to be, ‘But, how will the trust pay me for my shares?’ Payment can be satisfied in multiple ways:

• Cash – The consideration may involve a day 1 payment of the trading company’s surplus cash, together with a combination of the methods listed below.
• 3^rd party loan – Funding can be obtained from a bank in the form of a loan, and this loan can be used to pay you for your shares. The loan will then be repaid out of future profits.
• Seller loan – This will work in the form of an ‘I.O.U’ from the trustee company to yourself (and any other selling shareholders).
• Deferred payments – This will involve payment of the purchase price to you in instalments on agreed dates for a set period of time until the full amount has been settled.

Relying on a combination of methods can also help spread risk, which can be useful for mitigating against the adverse effects of any unforeseen events. Affordability is also a key factor, and the trustees must be satisfied that the financial commitments are achievable, and will not cause the company to fail. In addition to this, the trustees must be clear as to the obligations of an EOT, which broadly relate to ensuring that the trust operates for the benefit of the employees as a whole, whilst allowing the business to continue its success. If you require further information about how EOTs are funded, or have questions about how to implement an EOT, please contact us to speak to a member of our Corporate Team.