If you are considering selling your shares to an Employee Ownership Trust (EOT) then you may be wondering what share valuation to use. Craig Simpson, Tax Partner at Bates Weston, provides some guidance notes to help.
An independent valuation is vital for the trustees and the vendor shareholders, so appointing a suitable valuer is appropriate. This need not cost tens of thousands of pounds and this work has been undertaken for between £6,000 and £7,000 on our recent EOT cases. There will be examples of overvaluation in EOT transactions so the temptation to inflate a valuation should be avoided. HMRC could take issue under transactions in securities anti-avoidance and convert a tax free gain to an income tax cost of 39.35%. But more likely HMRC could use the sale of shares at over value rules in the Employment Related Securities legislation, which would tax the excess to PAYE/NI under Chapter 3D, Part 7, ITEPA 2003, leaving a 47% income tax and national insurance cost and employers NI at 13.8%.
Whilst valuations may well be sensible and arms-length, in our experience there is a tendency for the shareholders to over estimate the ability of the company to pay the deferred consideration. It is good to challenge the shareholders to ensure they are happy with the payment profile. Flexibility can be built into the Sale and Purchase Agreement to allow for the deferral of payments and acceleration if profits and cash allow.
EOT deferred consideration should not be seen as a replacement for salary. A suitable salary should be paid if the individuals continue to work in the business.
Getting the valuation early in the EOT thought process will pave the way for a well organised and affordable implementation.
Please contact Craig Simpson or Richard Coombs if you would like to find out more about EOTs.
As always, you are reminded that this article is generic in nature and you should take no action based upon it without consulting your professional advisor.
