What Is an Employee Ownership Trust (EOT)?

An Employee Ownership Trust (EOT) is a way for business owners to sell their company to their employees. Instead of selling to an obvious third party, the ownership trust EOT holds a controlling interest in the business for the benefit of all its employees. This means the company can transition to employee ownership without employees having to buy shares directly. Legal professionals, such as those at Darwin Gray, can help the process run smoothly by advising on the legal, financial and structural aspects.

The UK government introduced EOTs in 2014 to encourage employee ownership and offered tax advantages. If structured correctly an EOT funded transaction can be tax free for the selling shareholders and allow employees to share in future profits. If you are new to this model understanding what is an Employee Ownership Trust EOT and how it differs to traditional ownership structures is key.

How Does an Employee Ownership Trust Work?

In an employee ownership structure the business owner sells their shares to a trust instead of a competitor or management buyout. The trust then holds the shares on behalf of the company’s employees.

Here’s how an EOT funded transition works:

1. Independent Valuation – The company must have an independent assessment to determine its value. This ensures the purchase price is fair for both the existing owners and the employees.
2. Trustee Company Formation – A trustee company is set up to manage the ownership trust and make decisions in the best interests of the employees.
3. Share Purchase Agreement – A formal share purchase agreement outlines how the trading company’s shares will be transferred to the trust.
4. Deferred Consideration – In most cases the trust does not pay the full purchase price upfront. Instead the payments come from the future income generated by the company.

Once the EOT is in place the company operates as an employee owned business, employees benefit from future income and tax free bonuses and the former owners receive payments over time. Unlike direct employee ownership where individual employees hold shares, an EOT is an indirect employee ownership model, the trust holds shares on behalf of employees collectively not individual employees.

What Are the Tax Benefits of an EOT?

The UK government offers generous tax breaks to encourage employee ownership. Some of the key tax incentives are:

• Capital Gains Tax Relief – When shareholders sell a majority stake (over 50%) to an EOT they qualify for a tax free disposal under business asset disposal relief. They don’t pay capital gains tax on the sale.
• Tax Free Annual Bonuses – An EOT owned company can pay annual bonuses to employees tax free up to a certain limit per employee per year.
• Inheritance Tax Relief – EOTs can help with succession planning by removing the risk of inheritance tax on company shares.
• National Insurance Savings – Employees who receive tax free bonuses also pay lower national insurance contributions.

These financial benefits make EOTs a alternative to a trade sale or other succession strategies. Plus a well structured EOT funded company can see improved employee engagement as employees feel more invested in the long term success of the business.

Why an EOT instead of a Trade Sale or MBO?

For many business owners an EOT offers a way to secure their company’s future while rewarding employees. Here’s why an EOT might be the right choice:

• Business Legacy – Instead of selling to a competitor the business stays in the hands of the people who built it.
• Tax Efficient Exit – Selling shareholders can receive capital gains from the sale without paying capital gains tax.
• Better Business Performance – Studies show employee owned businesses have engaged employees, higher productivity and better retention rates.
• No Need for an External Buyer – Unlike a trade sale an EOT doesn’t require finding an outside investor or buyer.
• Stability for Employees – Employees get job security and a direct interest in the company’s success.

If you’re a business owner considering an EOT you need to assess whether your company is a good fit. Eligible employees need to be involved in the transition for long term success. Compared to direct employee ownership where individuals take on personal financial risk when buying shares an EOT allows shared benefits without employees having to buy shares themselves.

Is an EOT right for your company?

An EOT funded transition isn’t suitable for every business. Here are the key factors to consider:

• Trading Status – The company must be a trading company or part of a trading group to qualify.
• Employee Participation – The trust must benefit all its employees not just key employees or senior staff.
• Independent Assessment – A fair market value must be set to ensure the purchase price is reasonable.
• Future Profitability – The company needs to generate enough future income to fund the deferred consideration owed to the selling shareholders.
• Management Team Readiness – If the existing owners plan to step back a strong management team needs to be in place to run the business.

If your company meets these conditions an EOT can be a tax efficient, employee focused alternative to a traditional sale.

How to Transition to an Employee Ownership Trust

If you’re considering an EOT here’s how to get started:

1. Assess Your Goals – Decide if an EOT aligns with your succession plan and business values.
2. Get an Independent Valuation – Work with professionals to determine your company’s market value.
3. Set Up the Trust – Form a trustee company to manage the transition.
4. Agree on Payment Terms – Structure the deferred consideration so the trust can afford the purchase price over time.
5. Complete the Sale – Sign the share purchase agreement and transfer the company to the EOT.
6. Engage Employees – Make sure your employees understand the employee ownership structure and their role in the business’s future.

With the right planning an EOT can be a stable and rewarding transition for both business owners and employees. When combined with employee engagement initiatives, an EOT can drive long term success and stability.

Conclusion

An Employee Ownership Trust (EOT) is a way to transfer ownership while benefiting employees and maximise tax incentives. Instead of selling to a competitor you can create an employee owned business that shares its success with those who built it.

The tax advantages are significant – capital gains tax relief and tax free annual bonuses – making it a tax efficient option for business owners looking for a fair and sustainable succession plan. Unlike direct employee ownership where individual employees buy shares an EOT allows indirect employee ownership where the trust holds shares on behalf of all employees collectively.

If you’re considering an EOT get professional advice to help you through the process, ensure compliance and maximise the financial benefits for you and your employees.