As businesses continue to be buffeted by turbulent economic conditions, it is natural that many business owners are looking for the door.
One of the most popular forms of succession is Employee Ownership Trusts (EOTs), but this has recently seen notable changes in the Autumn Budget.
Now the question has arisen as to whether EOTs remain an effective succession strategy or not.
What has changed with EOTs?
An EOT is when a trust, operating on behalf of the employees of a company, acquires a controlling interest in the company.
This generally leads to a more democratic form of leadership going forward and is a key way of preserving the culture of the workplace when the owner exits the company.
Since the tax-friendly EOT regime was introduced in 2014, the popularity of EOTs as an exit route has increased.
This is because the Capital Gains Tax (CGT) relief on disposals to EOTs was a generous 100 per cent, but the Autumn Budget has now cut this relief to only 50 per cent.
While EOTs were not the right fit for every company, the increasing popularity of the exit strategy seems to have caught the attention of HMRC.
HMRC reported that the cost of CGT relief had increased significantly over the years, reaching £600 million in 2021/22.
There were forecasts suggesting it could rise to more than 20 times the original cost, to £2 billion by 2028–29, if reforms were not implemented.
Suspicion arose that there was an element of abuse to the EOT scheme, resulting in over-valued exits.
As such, the unexpected move by the Government to reduce the tax incentive for using EOTs is designed to combat potential abuse while still preserving the value of EOTs as an exit strategy.
This is because, despite the changes to CGT relief, EOTs still offer tax-free bonuses of up to £3,600 per employee each year and no Inheritance Tax (IHT) implications for selling shareholders.
Are EOTs still an effective succession strategy?
The main appeal of EOTs was likely not the generous CGT relief, but was more likely to be the way in which the business would be managed going forward.
EOTs have not lost any of the characteristics that would make them appealing, as they are still an effective way of rewarding employees for their dedication to making a valuable business.
The real issue that the Autumn Budget has created with EOTs is a slight wrinkle with financial planning.
If you are already in the process of preparing to depart your business and were lining up an EOT, you will now need to run your numbers again.
The shift in CGT relief may have a wider impact on your tax obligations, so consulting a professional is essential in ensuring that you are still fully compliant.
Our team are on hand to help you maintain the full value of your business as you prepare to leave it behind.
Whether you are retiring or moving on to new ventures, you will want to make sure that you do not lose out on the reward of your existing business that you have worked so hard to forge.
If succession is on the cards for you in the near future, then be sure to speak to us early so we can help you develop the most effective business succession strategy for you.
For expert financial advice and support in relation to EOTs, speak to our team today!
