Pay no tax when you sell your company… EOT

Most owners get Entrepreneurs Relief and so only pay 10% on the Capital Gain when they sell their business…  many are not aware there’s a 0% tax option…
Transfer controlling interest to an Employee Ownership Trust (i.e. sell the business to the employees) and you pay no CGT (and no Income Tax and no IHT) on the gains…
And the employees get tax benefits as well…
What’s not to like?

Why sell to an EOT?

  • You get to sell at full market value… to people you know… very quickly… and cheaply… and without the normal hassles of selling a company
  • And there are NO capital gains, income or inheritance tax liabilities …

Do all existing shareholders have to sell all of their shares… ? … no

Can existing directors (you?) stay on and get paid…? … yes

So how’d’s’t work

  1. EOT established
  2. The shareholders sell their shares (at least 51% of the company) to the EOT
  3. This creates a debt owed by the EOT to the shareholders
  4. Trading profits in future years will be used by the EOT to repay the debt to the original shareholders

Qualifying conditions… roughly

  1. The company must be a trading company (or the principal company of a trading group)
  2. The trustees of the EOT must spread the shares to eligible employees on the “same terms”… (and in general Trust property should be used for benefit of all eligible employees)… but…
  3. The trustees may distinguish between employees on the basis of remuneration, length of service and hours worked
  4. The trustees must hold, on an ongoing basis, at least a 51% controlling interest in the company
  5. The number of continuing shareholders who are directors or employees (and any person connected to them) must not exceed 40% of the total number of employees of the company or group

Fancy it?… here’s a great article from BDO   and a Tax Insider article

Gifting Shares… if you’ve got to…

So you want to give some of your shares to staff or family members?… it may trigger a Capital Gain Tax bill for you, and an Income Tax bill for them… even if no money has changed hands… so some care is needed

Gifting Shares to Employees

Don’t do it… simple as that… if you give them shares it’ll most likely be deemed to be ’employment related’ and they’ll get an income tax bill they won’t thank you for… (of course you could always pay that bill for them if you’re feeling really generous / loopy) …

… and they & the company will have to cough up NI contributions as well…

There are much better and more tax efficient ways to get some shares into an employee’s hands…. see EMI…

Gifting Shares to Family

Gifting to family (and non-employees) can be done totally tax free if care is taken…

Here’s the basics :

… when you give away shares it’s classed as a disposal at market value and triggers a Capital Gains Tax liability…

But… you can claim Gift Holdover Relief... which, to paraphrase HMRC,  means you do not pay Capital Gains Tax when you give away the shares… instead, the person you give them to pays Capital Gains Tax when they sell them…

All you BOTH have to do is fill in a simple form and the gifting of your shares will be CGT and Income Tax free… (it’ll even be Stamp Duty free if you claim Stamp Duty Gift Relief Exemption)

But what if the family member is an employee too ?

Aye, there’s the rub… gifting shares to employees is normally treated as Income Tax-able… but if it can be demonstrated that the gifting of shares is for reasons of family or personal relations, the income tax charge should be avoided…

eg… 2 kids… 1 working in the business, 1 not… only gifting shares to the 1 in the business may seem more like a reward than a gift???

And do you really need to do it now?

Gifting to a family member now may run the risk of a CGT or IT bill (eg if it is deemed employment related)… but leaving it in your will will avoid all taxes because shares in your trading company sit outside your estate on death…

(for IHT purposes a Trading Company is one that has no more than 50% non-trading activities…)

Gift now… or leave in Will… ?

It’s all about the ‘base cost” of the shares the receiver is getting…

Gifting… if you Gift the shares and get Gift Holdover Relief  the receiver’s ‘base’ cost for CGT purposes is the original cost of the shares to you…

Leaving in will… the shares will be IHT free due to BPR… and the base cost of the shares to the receiver will be the value at the time they receive them from your estate…

example… You founded a company with the typical £1 share start up company structure… 10 years later the company is worth £10m… and 1 year after that it is sold for £15m…

  1. gifting these shares when they were worth £10m would mean the receiver would pay CGT on the full £15m sale price when they sell the shares… (CGT at 20% would mean a £3m tax bill)
  2. if you left these shares in your estate rather than gift them and died in year 10… the shares would transfer free to the receiver, and establish their base cost at £10m… on selling the company the receiver would pay CGT on only the £5m gain in value from the £10m value when they received the shares… (CGT at 20% would mean a £1m tax bill)

Of course there are reasons for choosing Gifting over Willing (wanting to pass on control of the company… to incentivise the receiver… etc)… but from a tax point of view… inheriting shares rather than being gifted them will end up in a reduced CGT bill for the receiver… over time… should the shares ever be sold… !

Gifts With Reservations… a rather obscure IHT Trap…

Gifting shares to reduce exposure to Inheritance Tax (IHT) whilst continuing to benefit from the gifted shares may be caught by GWR anti-avoidance rules… if so, the shares get put back into the giver’s estate for IHT purposes…

The giver can continue to receive reasonable commercial remuneration for their work in the company… but HMRC say if as a part of the transaction ‘new remunerative arrangements are made you will need to examine all the facts to determine whether the new package amounts to a reservation’

Tax Insider 162

Trust a trust?

Trading companies for IHT purposes (no more than 50% non-trading) qualify for Business Property Relief (BPR) and so there are no IHT liabilities on gifting their shares… so placing shares into a family trust in which the children are beneficiaries will not generate a tax charge under IHT or GWR rules… even if the parents are trustees and get paid for their efforts (but votes from the shares must be used in the interests of beneficiaries)

Tax Insider 162

Mind The Gap !

If you can foresee your company breaching the 50% non-trading company limit for IHT purposes… consider gifting the shares before you exceed the CGT non-trading company limits of 20%

Say… right now you have a 100% trading company… but as profits grow and funds are left in the company it will invest in property… 20 years of that and you may have a company that breaches the 50% limit for non-trading activities when it comes to IHT… so… it may be best to gift the shares before the company breaches the 20% non-trading CGT Gift Holdover Relief threshold

(although one aggressive interpretation of the non-trading rules says it only has to be a trading company at the time of gift..)

If Gifting shares is a problem… just issue new shares instead?

O no you don’t ! … TCGA 1992 says effectively that if a person who has control over a company exercises it in such a way as to cause value to pass out of that current owner’s shares and into other shares in the company it will be treated as a disposal of the existing shares.

Tax Insider Business 84

Part Payment won’t work either! …

The difference between the payment and the market valuation of the shares would be a benefit that would be subject to income tax (and NI)

Undervaluation wrinkle…

… if the share transfer was deemed to be below market value HMRC could seek to tax the difference as employment income. If you want to protect the employee from a nasty IT bill later you could include a consideration adjustor clause in the contract around the share transfer so that the consideration is altered to the HMRC agreed amount upon any successful challenge by them of that share value (Ballards)

Gifting Tax Summary… rough… for shares in a trading company (or the holding company of a trading company)

IT… employee may suffer it if deemed employment related (or even disguised remuneration)

NICs… company and employee may suffer NIC if employment related

CGT… should be no problem if Gift Holdover Relief claimed…  claim has to be made by giver & receiver (company must be no more than 20% non-trading)

IHT… shares in trading company should attract BPR so should be no IHT issues (outside of estate) … (company must be no more than 50% non-trading)… take care with post gift remuneration packages / arrangements because of GWR

SD… should be no problem if SD Gift Exemption relief claim

Take care it is a trading company… if the company has ‘chargeable non-business assets’ (eg  investment property) the gift relief may be restricted

and here’s an article trying to hustle up fees for tax advisers

Ross Martin link

 

 

BS Shareholder schemes

CSOP … SAYE … SIP … schemes to get shares into the hands of staff … to be avoided … because there are simply better ways to do it…

If you really need to know why …

SIP and SAYE must be offered to all employees on similar terms … yeah right

CSOP (the Company Share Option Plan) used to be the scheme of choice for companies like yours … but it’s bobbins compared to the newer and funkier and government favoured EMI (just one eg …CSOP caps the share values at £30k … under EMI it’s £250k)

(See EMI … Growth Shares … and EMI v GROWTH SHARES)