An employee ownership trust (EOT) is an increasingly popular model for business succession, offering a tax-efficient way to transition ownership while rewarding employees. This structure ensures that a company’s future is safeguarded in the hands of its workforce, fostering long-term stability.
Many business owners choose an EOT as an alternative to traditional exit routes such as trade sales or management buyouts. It provides continuity and can enhance employee engagement by offering a stake in the company’s success. Our team is experienced in advising business owners on the legal and regulatory aspects of EOTs, helping them navigate the complexities of implementation.
What is an employee ownership trust?
An employee ownership trust (EOT) is a legal structure that allows a company to become substantially or wholly employee-owned. This is achieved by establishing a trust that holds a controlling interest in the company on behalf of employees. The model was introduced by the UK Government in 2014 to encourage wider employee ownership.
One of the main benefits of an EOT is that it enables business owners to sell their shares without triggering capital gains tax, provided certain conditions are met. Employees do not buy the shares directly; instead, the company typically funds the purchase through its profits over time, making it an attractive option for succession planning.
How does an employee ownership trust work?
An Employee Ownership Trust (EOT) allows a business to transition to employee ownership by selling a majority stake (51% or more) to a trust set up for the benefit of its employees. This provides a structured and tax-efficient way for business owners to exit while ensuring long-term stability.
To establish an EOT, the business owner sells shares to the trust at an agreed market value, often financed through company profits, external funding, or a deferred payment structure. Once the sale is completed, the trust holds the shares on behalf of the employees, who benefit indirectly from business success without owning shares individually.
The company continues operating as normal, with existing leadership often remaining in place. Employees typically receive financial rewards, such as tax-free bonuses, but do not gain direct decision-making power unless additional governance structures are implemented.
For business owners, the transition to an EOT offers significant advantages, including Capital Gains Tax (CGT) relief when selling their shares. Employees benefit from increased engagement, improved job security, and a sense of shared ownership, contributing to the company’s long-term success.
Is Employee Ownership Trust good for employees?
Yes, an Employee Ownership Trust (EOT) benefits employees by providing job security, financial rewards, and a stronger voice in the company’s future. Employees may receive tax-free bonuses and share in business success, fostering greater engagement and motivation. However, they don’t own shares directly and have limited decision-making power.
What are the downsides of EOT?
While an Employee Ownership Trust (EOT) offers many advantages, there are potential downsides. One key challenge is funding the purchase price. Unlike a traditional sale, where an external buyer provides upfront capital, an EOT is often financed through company profits or deferred payments. This means former owners may not receive their full payment immediately and must rely on the business's ongoing financial health. Additionally, the sale price may be lower than what could be achieved through a third-party sale, as external buyers might offer a premium for strategic acquisitions.
Another potential downside is the need for strong leadership and governance. While employees indirectly own the company, they do not have individual shares and often lack direct decision-making power. Without effective management and engagement, the benefits of employee ownership may not be fully realised, leading to disengagement or inefficiencies. Furthermore, EOT-owned businesses may find it harder to attract external investment, as control remains with the trust rather than traditional shareholders. Ensuring long-term success requires a well-structured governance model and ongoing employee involvement to maintain motivation and business performance.
What happens to the profits in an EOT?
In an Employee Ownership Trust (EOT), profits are typically reinvested into the business, used to repay former owners, or distributed as tax-free bonuses (up to £3,600 per year) to employees. The trust ensures profits benefit the workforce while maintaining financial stability and business growth.
How long does an employee ownership trust take to setup?
Setting up an Employee Ownership Trust (EOT) typically takes 3 to 6 months, depending on the complexity of the business and funding arrangements. The process involves valuing the company, structuring the trust, securing financing, and completing legal and tax compliance. Proper planning can help streamline the transition.
Who owns an employee ownership trust?
An Employee Ownership Trust (EOT) is owned by a trustee or board of trustees who hold shares on behalf of the employees. While employees benefit from the company’s success, they do not own individual shares. Instead, the trust maintains control, ensuring the business operates for the long-term benefit of its workforce.
Who are the trustees of an employee ownership trust?
The trustees of an Employee Ownership Trust (EOT) are individuals or entities responsible for managing the trust and acting in the best interests of the employees. They can include:
Independent Trustees: External professionals providing impartial oversight.
Company Directors: Senior leaders ensuring business continuity.
Employee Representatives: Staff members representing the workforce.
Corporate Trustees: Specialist organisations managing the trust.
A balanced trustee board ensures fair decision-making and long-term success of the EOT.
How is an employee ownership trust taxed?
An Employee Ownership Trust (EOT) offers several tax advantages for both business owners and employees:
- Capital Gains Tax (CGT) Relief: Business owners who sell at least 51% of their company to an EOT pay no CGT on the sale, provided all qualifying conditions are met.
- Income Tax-Free Bonuses: Employees of an EOT-owned company can receive tax-free bonuses of up to £3,600 per year. However, National Insurance Contributions (NICs) still apply.
- Corporation Tax Deduction: The company can usually claim a corporation tax deduction for payments made to the EOT when funding the purchase of shares.
- Ongoing Tax Treatment: The trust itself does not pay tax on holding the shares, but if it later sells them to a third party, normal tax rules apply.
To maintain tax benefits, the EOT must continue holding at least 51% ownership of the company and operate for the benefit of all employees.
Who funds an employee ownership trust?
An Employee Ownership Trust (EOT) is typically funded through one or a combination of the following sources:
- Company Profits: The business generates surplus profits over time to pay the former owners.
- External Financing: Bank loans or private funding can be secured to finance the purchase.
- Deferred Payments: The previous owners agree to be paid in instalments from future business earnings.
The funding structure is designed to ensure a smooth transition while maintaining the company’s financial stability.
How to set up employee ownership trust
To set up an Employee Ownership Trust (EOT), a business must first value the company and structure the trust. A trustee board is appointed to oversee it, and funding arrangements (company profits, external financing, or deferred payments) are established. Legal agreements are drafted, and the sale is completed. HMRC compliance is ensured, and employees are informed of their new ownership structure. The process typically takes 3 to 6 months.
Contact us for employee ownership trust legal advice
If you are considering an employee ownership trust and require expert legal advice, contact us today. Our team is available to discuss your options and guide you through every stage of the process.
Call us on 0161 696 6170 or complete our online enquiry form to arrange a consultation.
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