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Family Investment Companies

robin-hastings-1-1Traditionally, the most common way to pass down family wealth has been by way of discretionary trust structures. However, recent changes to the tax regime now mean that family investment companies (FICs) could offer more favourable tax treatments when deciding how to deal with future generations – particularly for individuals with large inheritance tax (IHT) estates.

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Employee Ownership Trusts

What is an employee ownership trust (EOT)?

An employee ownership trust (EOT) is a trust established for the benefit of the employees of a business. Selling a majority stake in your company to an EOT will mean that your employees will have an indirect interest in the business, potentially leading to increased performance and commitment, as well as a number of additional benefits:

  • A disposal of a majority shareholding in a company to an EOT will generally be free of capital gains tax, income tax and inheritance tax.
  • Bonus payments of up to £3,600 per year can be made to employees of the business, tax-free.
  • Full market value for the shares can be realised by the selling shareholders.
  • The shareholders do not have to sell all of their shares, so can continue to have a stake in the business, and can remain as directors of the company post-sale.

In order to sell shares to an EOT and realise the benefits outlined above, a company (which must be a trading company or a holding company of a trading company) will usually be incorporated to act as the trustee of the EOT. The relevant company and the EOT trustee will enter into a trust deed, under which the property held by the EOT trustee, such as the shares in the company, are held for the benefit of the company’s employees.

The company’s shareholders will then agree to sell more than 50% of the shares in the company to the EOT Trustee. Depending on how the transaction will be funded, the purchase price may be left payable on deferred terms so as to allow the dividends received by the EOT trustee from the trading company to be used to pay the purchase price.

What is required to qualify?

In addition to the requirement that the relevant company must be a trading company, there are certain additional requirements which must be met in order for the transaction to qualify for the tax treatment benefits:

  • The “all-employee benefit” requirement. The terms of the trust must not permit the trust property to be applied other than for the benefit of all the business’ employees, to transfer the property to another trust, or to make loans to the trust beneficiaries.
  • The “equality” requirement. Any distribution from the trust fund, or payment under a bonus scheme, must be for the benefit of all eligible employees, on the same terms.
  • The “controlling interest” requirement. The EOT trustee must hold at least 50% of the ordinary share capital, voting rights, profit entitlement and entitlement to assets on a winding-up.

What are the benefits?

You will appreciate this tax-efficient structure provides another exit opportunity to management alongside trade sale, traditional MBOs (VIMBOs, MBIs, etc.), listings and asset sales. This allows management partially to de-risk their investment and unlocks tax-free capital to invest elsewhere.

Bearing in mind the succession issues experienced by owner-managers since the financial crisis of 2008, this structure is well worth considering as part of clients’ financial planning.

This structure is also well suited to professional service firms where ownership and capital value may be barred due to the high cost of buy-in. Using this method would incentivise and tie in valuable members of teams and ensure a fruitful final exit for management and employees

How can we help?

If you would like to discuss the benefits of implementing an EOT structure, we would be happy to discuss it further with you. Bermans can assist in all aspects of the transaction, including:

  • Setting up the company to act as the trustee of the EOT.
  • Preparing the trust deed between the company and the EOT trustee, detailing the terms on which the company’s shares will be held for the benefit of the employees.
  • Preparing the constitutional documents of both the company and the EOT trustee.
  • Drafting and advising on the share purchase agreement relating to the sale of the shares to the EOT trustee.
  • Advising on any documents or structures relating to the funding of the transaction.

Contact

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Daniel Hall


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Trainee Solicitor

Dan graduated from the University of Bristol in September 2017, having completed his Masters in International Commercial Law, receiving a First Class Law degree and a Distinction in his LPC.

Dan is currently working in Bermans Property and Corporate departments.

Prior to working at Bermans, Dan worked in the Dispute Resolution and Litigation department of a London based law firm.

Outside of work Dan is a very keen skier and represented Wales and Team GB in alpine skiing on several occasions as well as competing at the Youth Winter Olympic Games.


Email: Daniel.hall@bermans.co.uk

Tel: 0151 224 0521

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Share Buybacks – When Are They Void?

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A share buyback (a process whereby shares in a company are bought by the company itself and cancelled) is a popular and relatively less-complex way for companies to provide an exit route for, or return surplus cash to, its shareholders. Whilst the law and procedure for carrying out a share buyback is quite clear and straightforward, we have dealt with a number of instances where the validity of a share buyback has been questioned and further action required to be taken in order to ratify the validity of a buyback transaction.

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Buying distressed businesses

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In this article, Jon Davage outlines some pointers for those seeking acquisition opportunities via an insolvency process.

The folding of a company may be catastrophic for the stakeholders of the relevant company, but insolvencies provide buyers with the ability to acquire assets and valuable customer contracts at reduced prices. However, acquisitions of this type are not without their perils and often have hidden costs. Here are some issues to consider before you embark on this type of deal.

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Stephen Jarman

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Partner

Stephen joined our Manchester based corporate team as a partner in April 2018.

Stephen has a degree in law and qualified as a solicitor in 1991.

His focus is mainly on company formations, mergers and takeovers, disposals and MBO/MBIs, as well as general commercial contracts and advice.

His clients are both regional and national and range from sole traders to large companies.

Outside of work, Bolton based Stephen enjoys going to the gym, supporting Manchester City, gardening and spending time with his granddaughter.


Email: stephen.jarman@bermans.co.uk

Tel:0161 827 4616

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Adam Patel


Trainee Solicitor

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Adam graduated from the University of Huddersfield in July 2017, having completed the Masters of Law and Practice and receiving a First Class Law degree and a Distinction in his LPC.

Adam is currently working in Bermans Asset Finance, Invoice Finance and Corporate departments, dealing with securities and corporate transactions.
Being a snowboarding enthusiast, Adam often during the winter, spends time on the slopes of the mountains of Czechia.


Email: adam.patel@bermans.co.uk

Tel: 0161 827 4608

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Matthew Montgomery


Trainee Solicitor

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Matthew is currently a Trainee Solicitor based in Manchester, he joined Bermans in September 2017, and is currently assisting in firms corporate department.

Matthew studied Law at the University of Liverpool before completing the Postgraduate Diploma in Legal Practice part-time at the University of Law, Manchester.

He has gained a vast amount of experience and knowledge in both Commercial Litigation and Insolvency, through working as a Paralegal in London and Manchester before commencing his Training Contract.

Matthew is highly motivated by delivering excellent client advice and service.


Email: matthew.montgomery@bermans.co.uk

Tel: 0151 224 0525

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