In our April 22, 2022 blog post, we discussed the Canadian Budget 2022 announcement, regarding the introduction of a new special purpose trust, the “Employee Ownership Trust”, under the Income Tax Act (Canada), to encourage employee ownership of Canadian businesses. That post set out the detail, then available, regarding the introduction of this employee ownership driven entity, into Canadian law. As we mentioned at that time, both the United States and the United Kingdom support and encourage employee ownership through these types of arrangements, along with the corresponding tax legislations to facilitate their use.
We thought it might be interesting to see how Employee Ownership Trusts are being utilized in the UK.
It is significant to note, that the number of businesses transferring ownership to employees through Employee Ownership Trusts (EOTs) has trebled from 127 in 2019 to 384 in 2021, while the number of new EOTs has jumped 800 per cent from just 41 in 2019. UK Law firm Boodle Hatfield says that EOTs are becoming ‘increasingly popular’ amongst entrepreneurs looking to exit their business because the shares can be sold to employees via a trust company without incurring income tax, capital gains tax or inheritance tax liabilities on the disposal.
Boodle Hatfield says the benefits of EOTs are considerable. As well as the tax advantages, there is less need for lengthy due diligence processes that would be necessary when selling to an external party. The risk of a deal collapsing due to disagreements between vendor and purchaser is also much reduced. Establishing an EOT is generally a more cost-effective way of selling a business, as advisory fees tend to be lower.
The opportunities of this type of employee ownership model in Canada, supported by the required amendments to the Income Tax Act (Canada), could come at just the right time for the Canadian economy. As the economy shows signs of slowing, it could lead to a reduction of activity in M&A market, making it harder for business owners to sell up to traditional buyers. We could therefore see further increases to the number of businesses seeking to become employee-owned, as a sale to an EOT for the benefit of the company’s staff can be much more straightforward.
We shall keep you posted on all developments related to Employee Ownership Trust.
If you have any questions or would like advice related to the matters set out in this post, or if you have questions in relation to matters of real estate, business law, intellectual property and trust and estate matters, please contact us at 604-688-4900 or by email to Paul Barbeau at email@example.com or to Morgan Best at firstname.lastname@example.org