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Employee Ownership Trusts

Introduced by the Government in 2014 to expand employee share participation, Employee Ownership Trusts (often referred to EOT’s) have become one of the most popular options for owners to secure a tax efficient exit from their business.

Properly structured, the sale of an individual’s shares in a trading company will be free of capital gains tax. In addition, the employees of the company can benefit from a tax-free annual bonus of up to £3,600.

As with any generous tax reliefs there are qualifying conditions that need to be met (by both the EOT and the company) in order to benefit from these. These conditions must also continue to be met on an ongoing basis in order to prevent the tax reliefs from being withdrawn.

One of the fundamental conditions that needs to be met is the “equality and participation test” which can often be misunderstood and if breached can be costly.

Freestone Jacobs have extensive experience in establishing EOT’s for all sizes of companies and we can also act as an independent Trustee to ensure that the qualifying conditions continue to be met.

For more information please contact us.

Enterprise Investment Scheme and Seed Enterprise Investment Scheme (SEIS)

EIS and SEIS provide generous tax reliefs for investors including income tax relief for the initial investment (30 percent for EIS investments and 50 percent for SEIS investments) and capital gains tax free disposals of the investment.

These tax reliefs are designed make it easier for companies to raise equity capital.  However as is often the case when tax reliefs are available, they come with strict conditions.

In order for the investor to benefit from the tax benefits both the company and the investor are required to meet certain conditions at the time of the investment – many of which must continue to be met for a three year period starting from the date of the investment. The EIS and SEIS legislation can be a minefield and often companies will either fail to meet these conditions or unwittingly breach them during the three year qualifying period. This will result in the tax relief being either denied or withdrawn.

Freestone Jacobs can advise both companies and investors on any proposed EIS or SEIS investment to ensure that tax relief will be due.  We can draft and submit an advance assurance request to HM Revenue and Customs (HMRC) which will provide investors with confidence that relief will be due on their investment.  Once the investment has been made, Freestone Jacobs can also submit the company’s claim for relief which, once approved by HMRC, will enable the company to formally issue tax certificates to the investors so that they may claim the tax relief due.

For more information please contact us.

Enterprise Management Incentive Scheme (EMI)

The Enterprise Management Incentive scheme is a share option scheme which is approved by HM Revenue and Customs and enables share options to be granted to employees at the company’s discretion.

Each employee who participates in the EMI scheme must work at least 25 hours per week or spend at least 75 percent of their working time actually working for the company.  Subject to this, options can be granted to selected employees and, when exercised, enable the employees to acquire shares in the company at a preset price, without giving rise to any tax charges.  The preset price must be at least equal to the value of the shares at the time the options are granted and this may be substantially less than the value of the shares when the options are exercised.

It is common practice for performance conditions to be attached to the options before they may be exercised and these can be tailored to each individual employee.  The options must be capable of being exercised within ten years.

In order for an EMI scheme to be established, a valuation of the shares to be issued should be agreed with HM Revenue and Customs and this will form part of the formal documentation.  It should be noted that the maximum value of unexercised options that can be held by one employee is £250,000 and individuals may also not have an interest exceeding 30 percent of the company under the rules of the scheme.

There are a number of other conditions which need to be satisfied by the company and the employees.  However, if these are met and the terms for granting and exercising options are carefully tailored to the business’ needs then the EMI scheme is a tax efficient way to motivate key employees and pass ownership of the company to them in the future.

For more information please contact us.

Family Investment Companies

Family investment companies (often abbreviated to “FIC”) have become a popular inheritance tax planning tool in recent years. These normally have two classes of shares often called “frozen shares” and “growth shares”.  Generally a family’s older generation can look to establish the FIC whereby the growth shares are gifted to the younger generation and whilst the frozen shares are retained.

An interest free loan is then made available to the FIC to invest meaning that any future growth in value of those investments will be reflected in the shares held by the younger generation.

In many cases it may be possible to gift the growth shares to a trust which can further increase the inheritance tax benefits.

For more information please contact us.

Restructuring Your Company

Company restructures can take many different forms and will often depend on the reason for the restructure.  Arrangements can include:

  1. Purchase of own shares
  2. Statutory demergers
  3. Non statutory demergers
  4. Capital reductions
  5. Establishing holding companies
  6. Management buyout special purpose vehicles,

There are many reasons why shareholders might want to restructure their companies such as (but not limited to):

  1. Restructuring the assets of a business prior to a sale, for example where a vendor wishes to buy a business but not the trading premises.
  2. Splitting two or more distinct business units from each other to enable each of them to be managed more effectively.
  3. The retirement of older shareholders as part of a management buyout.
  4. Separating valuable assets from the trading activities of the company.
  5. Tax efficient succession planning for family companies.

The restructuring of a company requires consideration of a number of taxes including capital gains tax, income tax, VAT, inheritance tax, stamp duty and stamp duty land tax and, if the proper advice is not obtained, significant tax liabilities can arise. In many cases it is possible to secure advance clearances from HM Revenue and Customs to confirm that statutory reliefs from the above taxes are available.  Freestone Jacobs have over thirty years of experience advising owner managed businesses on how to restructure their business and minimise any associated tax liabilities.

For more information please contact us.

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