Autumn Budget 2024: A tax-free sale to an EOT just got even more attractive

Given the increased CGT rates announced by the government today, EOTs are likely to become an increasingly popular option for those looking to sell their company.  

What has changed?

Rachel Reeves has announced that the CGT rates will increase to 18% and 24% (from 10 and 20%), with effect from 30 October 2024. 100% relief from capital gains tax remains available, however, upon the sale of a majority of the shares in a trading company to a qualifying employee ownership trust (EOT). 

Selling to an EOT is an increasingly popular alternative exit for business owners in the UK, not just because of this 100% tax break, but also because it secures the independent future of the company in a way that delivers the benefits of employee ownership to employees.  An EOT holds the shares in a company for the benefit of that company’s employees. Additionally, employees of EOT owned companies can benefit from an annual bonus, the first £3,600 of which may be paid income tax-free. 

Should you consider an EOT?

The increase to CGT rates means that sale to an EOT (at 0% CGT) now offers a significant tax advantage in comparison with a traditional sale (eg to a trade buyer or private equity).

Despite the obvious attraction of a tax-free sale, an EOT is not necessarily the right structure for every company. We recommend you think about the following three questions if you are considering selling your company to an EOT:

1. Does your company have good medium to long term prospects?  

• Although EOTs can provide an exit to shareholders, the purchase price is often funded primarily out of future company profits. If a company does not have a reasonable level of profitability, it may be difficult for the company to bear the cost of repaying the purchase price (often over 5 to 7 years) while continuing to fund capital expenditure and growth. 

2. Are you ready to hand over control of your business?  

• The legislation is drafted on the basis that selling shareholders will genuinely transfer control of the business to the EOT. A selling shareholder may continue to work in the business and may sit on the board of the EOT, the government is legislating to prevent selling shareholders (or parties connected with them) from holding a majority on the board of the EOT trustee entity.  

3. Are your employees ready for the transition?  

• While employees stand to benefit from an EOT in the long term, the future success of the company will depend more than ever on their contribution, especially if the selling shareholders step down from senior management in the years following the sale.  

Forthcoming changes to EOT rules

The government has also announced long-awaited changes to certain EOT rules. We are preparing a separate update on these changes. 

How can we help you? 

If you want to know more about what exactly an EOT is please see our recent article on: What is an employee ownership trust?

If you are interested in considering a sale to an EOT, we have extensive experience:

• Advising companies such as Jonic Engineering Limited and Roch Valley Limited on their transitions to EOT ownership
• Carrying out complex pre-transaction restructurings prior to a sale to an EOT
• Reviewing EOT transactions and documents on behalf of other interested parties, such as banks and prospective trustees

If you want to discuss whether an EOT is right for your business, then please contact John Kahn or Katie Harman, who will be more than happy to help.