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We are experiencing an increase in enquiries regarding the corporate structures of our clients to ensure they are fit for the future as they seek to protect profitable or asset rich parts of their business from those which have or could run in to difficulties due to the pandemic.
Following the recent Budget we are also seeing increased levels of interest regarding exit strategies for owners as they seek to take advantage of the current capital gains tax regime before the next Budget. Some commentators feel capital gains tax could be reviewed, including an increase in rates to assist in paying back the debt created as a result of the pandemic.
The protection of assets involves incorporating a new company which sits as a new holding company or subsidiary to the existing trading company to form, or add to, a group of companies and into which the “good assets” are transferred and separated from the “bad assets”.
An example of this is the transfer of freehold property held by the client company to separate them from the trade or leasehold property, which in the current climate may be subject to a downturn or the demands of their landlord, as the case may be.
Once transferred and depending on tax, or banking requirements, it may be possible to demerge the good or bad assets out of the group, so that there is even further separation.
Whilst it may be possible to sell to a competitor or a buyer looking to enter a client’s market and achieve the best possible price, management buy-outs or buy-ins and employee ownership may be an easier route to exit, with the latter becoming increasingly popular, given the tax advantages for owners.
Management Buy-Outs or Buy-Ins
If the owner has a strong management team to buy them out or can create, or add to that, team external management candidates buying in, this can be a simpler route to exit, with often a quicker and more cost effective legal process. It can come at the cost of a lower sale price or deferred terms compared to a sale to a trade buyer but is worth considering.
This route usually takes the form of the management team incorporating a new company to acquire the owner’s shares in the existing trading company and can involve using the cash resources or assets of that company to fund all or part of the purchase price.
The owner can even exchange some of their shares in the target company for shares in the holding company and therefore remain a shareholder in the new structure. They will then continue to receive an income and look after their investment as they wait to get paid out. It also allows owners a second bite of the cherry when it is time for the management team to sell.
Employee Ownership – EBT’s
Employee ownership usually involves establishing an employee trust, commonly called an Employee Benefit Trust (or EBT), which requires the preparation of a trust deed under which shares in the trading company, are held on behalf of the employees.
Currently the most popular form of EBT is an employee ownership trust, which was created to encourage more companies to be employee owned, like the John Lewis model, as the material tax breaks allow owners to sell their shares to the trust free from capital gains tax and provide annual income tax free bonuses to be paid to employees.
For an EBT to be considered an employee ownership trust it must hold more than 50% of the shares in the company and if employees are to receive benefit from the trust they must all be included on the same terms.
So whilst, there may be tax breaks in using an employee ownership trust, it’s at the expense of some flexibility, as the owner would not be able to offer benefits to just their senior management team, as they would with a standard EBT.