The (very) basic principle is that an Employee Ownership Trust is set up in which all employees are beneficiaries.
You, as the business owner, sell at least 51% of the company to the Trust – and the gain is tax free. You can sell more, even 100%, or you can retain some of the shares.
The business has to be professionally valued so that it can be demonstrated that everything was done fairly.
The snag is that, at this stage, the Trust doesn’t have any money. Sometimes this is borrowed from a bank or other lender. More frequently, the seller agrees to accept payment over a number of years. This can be with or without interest. Bear in mind that there is no CGT to pay so spreading payment can be quite attractive.
Thereafter, the Trust receives dividends as a shareholder. Those profits are distributed to the beneficiaries (ie the employees) in a fair and equitable way following a previously agreed formula. Often this is in proportion to salaries paid.
Before distributing dividends to the Trust, the company can pay a tax free bonus (not NI free) of up to £3,600 pa to each employee.
An ideal candidate for an EOT is a company with between 20 and 250 employees where the owner (or owners) is planning to retire. The productivity increase averages at 5.2% – or twice the UK average.
The whole process can be quite lengthy in order to comply with all of the necessary legal steps – but can be beneficial to both the seller and the employees.
For more information, please check out the HMRC website