Employee Ownership Trusts (EOTs): A powerful model for business success and employee engagement.

An EOT is a form of employee benefit trust introduced by the Government via the Finance Act 2014. Designed to benefit both employees and companies, EOTs offer a sustainable and equitable approach to business succession and growth. Shareholders in limited companies and limited liability partners, can transfer all or some of its ownership to its employees. Essentially the employees must have a controlling interest of 51% or more.

The model is gaining popularity due to the favourable tax incentives and the desire for more inclusive business structures. Qualifying companies can now be sold to an EOT free of capital gains tax and EOT-owned businesses can pay its employees a tax-free bonus of up to £3,600 per year.

Key features 

• A majority of the company’s shares must be held by the EOT (at least 51%)
• An EOT is established as a trust fund with the trustees responsible for managing the shares on behalf of the employees
• Employees become indirect company owners and can receive financial benefits such as bonuses or profit shares
• Depending on the company / set up of the trust, employees can gain authority in the company decision making process
• EOTs provides tax incentives to encourage their adoption
• Exiting founders can use cash in the business, debt and loan note structures, which are subsequently repaid from company cash flows, to crystallise their value in the business

Advantages  

• Allows shares to be sold free from Capital Gains, Income and Inheritance Tax
• Employees can receive a tax-free annual bonus of up to £3,600
• Allows employees to indirectly purchase their company from its shareholders without using their personal funds
• Greater employee engagement and commitment
• The current owners can remain as directors and receive market rate remuneration after the share sale
• Allows a more seamless change of ownership without external influences and therefore preserves culture and legacy
• No need for disclosure of confidential company information to a third-party, protecting shareholder value

If you’re thinking about exit or succession planning for your business, an EOT is one of a number of options available to you. To find out more, please contact our Corporate Finance Team.