How to sell your limited company tax free

If you’re thinking of selling your business, it is important to keep tax considerations in mind. One way to do this is with an Employee ownership trust, which enables you to sell your business without tax (tax free). 

Employee ownership can result in many benefits to business as well as to employees, often encouraging motivation and increased productivity. Employee Ownership Trusts or EOT for short were introduced in September 2014. It’s only recently however, that everyone’s talking about them. 

The COVID pandemic, together with rumours and speculation of hikes to capital gains tax and reduction or even abolition of the Business Asset Disposal Relief to help pay off the billions of debt we’ve accrued since the start of the pandemic, have brought the scheme into the spotlight. The key sectors in which we are seeing a big movement towards employee-ownership, via employee ownership trusts, are in the marketing, architecture, construction, logistics and recruitment sectors.

When looking to sell, many have opted for an EOT rather than a standard, traditional sale. The reasons for this are varied. So here, we take a further look at how these tax advantages can be beneficial to your business as told by Hilton Smythe.

An employee ownership fund is a form of employee benefit trust which the Government introduced to encourage shareholders to pursue employee owned businesses. 

The government has encouraged this scheme by offering tax breaks to shareholders who move to an employee-ownership structure. Although attractive, the scheme is not as straightforward as you might think. It has a vast number of different rules and criteria to meet, and generally, it is a long term commitment. 

Here’s how it works:

• An EOT is formed with a corporate trustee. This is known as a Trustee Company.
• The shareholders sell their shares (or at least 51% of them) to the EOT. You’ll need an independent share valuation from an expert who is jointly appointed by both the shareholders and the Trustee Company.
• Once a sale has taken place, a debt is created between the Trustee Company and the shareholders for the sale price amount.
• The company pays off this debt through its profits and in turn, the repayments are paid to the shareholders.

There are many advantages for the business, which are highlighted below:

• It allows employees to indirectly buy the company from its shareholders without them having to use their own funds which creates an immediate purchaser.
• Shareholders can sell their shares for full market value (an independent valuation will be required)
• No capital gains, income or inheritance tax liabilities should arise on the disposal of a controlling interest in a company to an EOT (or on the subsequent receipt of the purchase price by the former shareholders)
• Not all shareholders need to sell their shares to the EOT

EOTs also include many employee benefits, which include:

• Employee enthusiasm and enjoyment 
• Reduced absenteeism
• Improved business performance 
• Overall improvement in company ethos 

To qualify for an EOT, you must meet and fulfil the following criteria:

1. The company being sold must be a trading company. Principle companies of a trading group also qualify.
2. Eligible employees must generally be offered an equal share. This often depends on things like earnings and length of service but mostly, all employers will need to benefit.
3. A sale must be for at least 51% of the shares in the business and in the same tax year. 

This scheme isn’t for everyone then but, if you meet the above points, want to sell your business tax free, and are happy to receive your money over time;  it’s a great option for you.

EOTs for Limited Companies 

EOTs are also an option for limited companies as well as traditional companies. Limited Liability Partnerships and companies that are part of a bigger group can also adopt this structure. If you’re not a Limited company, it can, however, be a little bit more tricky. You’d need to convert to a limited company first and subject to meeting certain conditions, you should be able to benefit from the scheme. 

Summary 

Selling your business tax free through an EOT can be beneficial if you’re aware of the criteria. If you are thinking of selling your business, it is important to remember that tax rules often change and getting professional advice can be the best way forward.

More on selling your business and limited comppany taxes.