What happens if the Employee Ownership Trust sells the shares?
We consider the implications for the previous owners, the Trust and the employees on the onward sale of the shares in the trading company.
As with any asset in the UK capital gains tax will be payable on the sale of the shares if they are disposed of by the employee ownership trust ("EOT").
Where an EOT is in place this is usually done to (i) put the company into employee ownership for all of the associated benefits that come with that, but also (ii) to allow the outgoing owner to obtain an exemption on the payment of CGT on their sale of the shares to the EOT (subject to certain statutory conditions).
Where a company's shares have been sold or gifted to an EOT, and the CGT relief applied, it is important to note that this does not actually extinguish the CGT. Instead, the CGT itself is rolled forward and will become due and payable by the EOT if it ever decided to sell the shares. This is important to note because the CGT could be significant if the value of the business has continued to rise, as the CGT will be calculated from the date on which the original owner (who sold the shares to the EOT) acquired them, not the date on which the EOT acquired them. The CGT liability will fall to the EOT to settle and cannot be claimed back by the EOT from the previous owner. This is one of the reasons that employee ownership is seen as a long-term solution for the company in question, since it is not an efficient way of flipping a company in the short-term following any rapid expansion or development.
In situations where the outgoing owner is still owed deferred consideration from the EOT for the shares sold to it initially, there should be restrictions placed in the company's governing documentation and articles of association which will allow that outgoing owner control over any decision to sell the shares, until such time as the payments due to them have been met. This provides comfort to the outgoing owner that they will be paid out ahead of any onward sale.
If the shares are sold by the EOT then the articles of association and the trust documents will cover off whether the value of the shares can be distributed amongst the employees (as beneficiaries of the trust) or if they instead should be applied for charitable purposes or to some other purpose. This is a commercial decision to be agreed during the process of setting up the employee ownership structure.
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The information in this article is necessarily of a general nature. The law stated is correct at the date (stated above) this article was first posted to our website. Specific advice should be sought for specific situations. If you have any queries or need any legal advice please feel free to contact Wrigleys Solicitors.