Exit stage left...

Exit strategies are important. If you're running a business and you don't want to work until you drop, it's wise to think about how you will retire and the effect of that on the business.

If it's just you, then it's likely that the business will stop when you do, but if you've spent years building up a good team and a profitable enterprise, there are a number of options available to enable you to exit in the most tax efficient way possible.

Of course, you could simply sell the business to someone else – whether that's a partner, one of the current employees or someone outside your business. However, whatever you are paid for your interest in that business will be subject to Capital Gains Tax (CGT).

There is another way.

In 2014 the government instituted beneficial tax breaks for Employee Ownership Trusts (EOT). Although the concept is not new (John Lewis started theirs in 1929), it's also not common.

It's not employee share options, so it doesn't get complicated when people leave the organisation. It's simply an enhanced bonus scheme.

How does it work?

• The EOT owns at least 50% of the shares in the company.
• The retiring owner passes their shares to the EOT at an agreed price per share – but no money changes hands initially.
• Over time, company continues to operate and the dividends relating to the shares now owned by the EOT are paid into the trust.
• The trust pays the former owner a share of that income tax free, so the former owner is paid for their shares over a period of time.
• The remaining money in the trust can be used to pay bonuses to all the employees equally, of up to £3,600 p.a. tax free.

As owners the employees benefit, if the business does well they make more money. This potentially improves motivation and job satisfaction.

Effectively, the EOT is now the majority shareholder.

The nitty-gritty

The current majority shareholder doesn't have to retire, but they would have to be willing to put their shares into an EOT and may still retain their operational role in the company, but would then be subject to the same remuneration package as other employees. And once they've put the shares into an EOT, they can't change their mind later!

Typically this works well with medium-sized companies with more than 20 staff – and the company has to have the right team, the right structure, and a business that can function without the current shareholder.

The biggest difficulty usually arises at the point where a value has to be calculated for the shares. This kind of exit strategy needs a good accountant to guide all parties through the process and probably legal advice to ensure all the contracts are watertight.