Employee Ownership Trusts

Employee Ownership Trusts (EOTs) have gained popularity as an alternative business model that promotes employee engagement and ownership. EOTs offer several advantages, including tax benefits for the company and its shareholders. This article delves into the concept of EOTs, their benefits, the eligibility criteria, and the process of setting up an EOT.

What are Employee Ownership Trusts?

An Employee Ownership Trust (EOT) is a type of employee benefit trust that enables employees to acquire a significant stake in their company. By transferring shares into the trust, business owners can create a sustainable ownership model that benefits employees, shareholders, and the company. EOTs were introduced in the UK in 2014 under the Finance Act to encourage more companies to adopt an employee ownership structure.

Benefits of Employee Ownership Trusts

1. Tax Benefits: EOTs offer significant tax advantages for the company and its shareholders. Business owners can benefit from a 0% Capital Gains Tax (CGT) rate when selling shares to an EOT, provided certain conditions are met. Moreover, companies controlled by an EOT can pay tax-free income bonuses of up to £3,600 per employee per year.
2. Employee Engagement: EOTs foster a sense of ownership and responsibility among employees, leading to increased engagement, productivity, and job satisfaction. When employees have a stake in the company, they are more likely to contribute to its success and share its values.
3. Business Succession: For business owners seeking an exit strategy, an EOT provides a smooth ownership transition while preserving the company’s legacy and values. It also ensures that the business remains independent and continues to operate for the benefit of the employees.
4. Retention and Attraction: Companies with an EOT structure can be more attractive to potential employees due to their unique ownership model and the possibility of tax-free bonuses. This can help businesses attract and retain top talent.

Eligibility Criteria for Employee Ownership Trusts: To establish an EOT and take advantage of the tax benefits, the following conditions must be met:

1. The EOT must have a controlling interest in the company, which means it must hold more than 50% of the shares and voting rights.
2. The company must be a trading company or the principal company of a trading group.
3. The trust must operate for the benefit of all employees on the same terms.
4. The number of continuing shareholders (and any connected persons) with a significant interest in the company should not exceed 40% of the total employees.

Setting Up an Employee Ownership Trust: Establishing an EOT involves several steps:

1. Valuation: Determine the value of your company’s shares by seeking advice from a professional valuer or accountant. This valuation will be the basis for the share sale to the EOT.
2. Trust Deed: Draft a trust deed that outlines the rules and regulations governing the EOT, including the appointment and removal of trustees and the distribution of benefits to employees.
3. Share Sale Agreement: Create a share sale agreement between the selling shareholders and the EOT, detailing the terms and conditions of the share transfer.
4. Financing the Transaction: Determine how the EOT will finance the share purchase, which could include a combination of cash, bank loans, and seller financing.
5. Employee Communication: Communicate the transition to an EOT structure to employees, explaining the benefits and the impact on their roles within the company. Open communication and transparency are critical to a successful transition.

Insights and Considerations for Business Owners

1. Timing: The timing of the transition to an EOT is crucial. Business owners should consider their long-term goals and the company’s financial health before deciding. Setting up an EOT can take several months, so it is essential to plan accordingly.
2. Financing: As mentioned earlier, financing the transaction is an important aspect of the process. The article suggests exploring options such as cash reserves, bank financing, or deferred consideration (an agreement where the selling shareholder receives payment over time). The financing choice will depend on the company’s financial position and the preferences of the selling shareholders.
3. Governance: Establishing a robust governance structure for the EOT is essential. The article recommends appointing a diverse group of trustees, including employee-elected representatives, to ensure that employees have a voice in decision-making.
4. Employee Engagement: The article emphasizes the importance of engaging employees throughout the transition process. Providing information sessions, workshops, and regular updates can help employees understand the benefits of the EOT and create a sense of ownership.

Employee Ownership Trusts offer a unique business model that promotes employee engagement, provides tax benefits, and ensures a smooth succession plan. Business owners can make an informed decision about adopting this structure by understanding the eligibility criteria and the process of setting up an EOT. Doing so can create a sustainable and successful company that benefits employees, shareholders, and the business.