If you are a business owner and are keen to reward your employees with bonuses, but would rather not have tax on bonuses, you do have the option to set up an Employee-Ownership Trust (EOT) which allows founding shareholders or owners of the company to give shares to employees tax efficiently as well as gift employees a tax-free bonus to a certain level per annum which is not subject to income tax (but does incur National Insurance Contributions charges).
A key issue faced by founder shareholders of a profitable and growing company, no matter the size of their businesses, is the tax consequences when sharing the success of their business with their employees.
Whilst there are tax reliefs available to business owners which enable the transfer of shares in a trading company to be made without incurring a liability to capital gains tax, the amount which business owners can receive for the transfer is limited.
Under an EOT structure, there are two valuable tax reliefs available which would allow founding shareholders and employees enjoy the fruits of their hard work with very little tax implications.
Share giving with no capital gains tax to employees
Firstly, The EOT structure means that the EOT owns the company, and employees receiving shares become beneficiaries of the EOT, alongside the founding shareholder(s) or owner(s) of the company. When a founding shareholder gives shares to an employee via the EOT structure, the employee will receive the proceeds of the qualifying sale up to the market value of the shares, without giving rise to a tax charge. The employee is therefore experiencing no capital gains tax charges.
Secondly, a founding shareholder can make payments to employees of up to £3,600 per annum which are free of income tax (but not national insurance contributions) and therefore alleviating tax on bonuses.
EOT structure, am I eligible?
To qualify for EOT status, a number of conditions must be met, including the requirement that all employees who participate do so on equal terms.
The other requirements include:
- The trading company must be fully owned by the EOT
- The EOT must operate for the benefit of all employees (other than certain excluded “participators”).
- The trust must have a controlling interest in the trading company
How can we help?
If you require further advice on the structure of your business, please contact us to help you through the process as tax efficiently as possible.
Often there is a requirement for forward tax planning to take full advantage of the tax reliefs available to you and your business so you can invest your hard earned cash back into your business. We strongly recommend you speak with a tax and accounting specialist like Southside Accountants, your local accountants in Wimbledon and London. Please contact us to see how we as your accountants can help you run your business effectively.
Southside Accountants provide sole trader services, including tax return services, to small businesses in the UK and are a Xero Certified Advisor.
Written by Shaima Todd.