The Succession Trust – an alternative to an Employee Ownership Trust or third party sale

If you’re thinking of stepping aside from your business there are a number of options that should be considered.

The dilemma facing business owners

Possibly the best place to start, is to establish whether you qualify for an Employee Ownership Trust (EOT).

EOTs are attractive for many reasons. An EOT is an effective method of transferring ownership onto your employees, and in doing so benefitting from a 0% rate of tax.

The consideration for your shares can be paid over a period of time and can be funded by retained and/or future retained profits.

However, for many businesses they either don’t qualify for an EOT or find the conditions of qualification to be too restrictive.

For those that don’t qualify for an EOT, they are likely to explore whether the business can be sold to a third party. The current taxation that applies to the sale of shares to a third party is that the first £1m is taxed at 10% Business Asset Disposal Relief (BADR), with the balance taxed at 20% Capital Gains Tax (CGT).

However, a third party sale can be fraught with difficulties. Can you find a buyer? If you can then are they prepared to pay the price you want for your shares? How will the current economic crisis and increased borrowing costs impact on the sale price? Will you be required to meet any high performance targets that are set as part of an earn out period. How will your loyal employees be treated by the new owners?

Then there is the risk that the rate of CGT is increased by the time you’re able to sell your business. The Office For Tax Simplification has recommended that the rate of CGT be aligned with Income Tax, which would result in significantly more tax paid by an existing business owner.

But there is an alternative.

The Succession Trust (ST)

The Succession Trust has many similarities to an Employee Ownership Trust, but can be less restrictive.

The ST is a form of UK Statutory Discretionary Trust that is set up to benefit all or most of the past, present and future employees (and their families) of your company, at the discretion of the Trustees.

Unlike an EOT you and your family are included in the class of beneficiaries.

Like an EOT, the consideration for your shares can be paid over a period of time and can be funded by retained and/or future retained profits.

Like an EOT you will be selling your shares to a known buyer at a fixed price, but without any of the difficulties faced when selling to a third party.

The current taxation that applies to the sale of shares to an ST is that the first £1m is taxed at 10% Business Asset Disposal Relief (BADR), with the balance taxed at 20% Capital Gains Tax (CGT), which is identical to the tax treatment when selling to a third party.

However, the ST can be put in place at any time with no need to find a third party willing to purchase your shares and if timed right you can protect yourself from any potential increases to the rates of CGT.

Also, similar to an EOT, the Succession Trust is tax compliant transaction as advanced clearance is obtained from HMRC.

How Berkeley can help

We provide an end-to-end service that starts with establishing whether you would qualify for an EOT. We will also arrange for an independent valuation of your business and should the Succession Trust be the right choice for you, then we will obtain clearance from HMRC, before guiding you through the whole process of implementing the Succession Trust solution.