Employee Ownership Trusts

Two people shaking hands.
Written by Alan Davidson
Alan Davidson is a Chartered Accountant, director and founder of Pentins Business Advisers, entrepreneur and author of the Amazon best-seller "Achieve Your Business Vision". With over 25 years of helping businesses succeed, Alan knows how to build a business with real value, while avoiding costly mistakes.
March 25, 2021

The Employee Ownership Trust (EOT) was introduced to the UK in 2014 in an attempt from the Government to promote employee ownership of businesses. In short, EOT is a business ownership model where a trust holds a stake in a company on behalf of the employees. 

In this article, I will explain the benefits of using an EOT, and why it’s often used in business succession planning.

What are the benefits of being owned by an Employee Ownership Trust?

Here are some of the key benefits to this arrangement:

  • More committed employees that care about the future of the business
  • More engaged employees
  • Improved business performance
  • Less absenteeism
  • Employees take more responsibility and initiative

It makes sense that employees would have a higher drive to perform better when they have an indirect stake in the business, as any business growth would be to their benefit.

Tax benefits

There are some great tax reliefs and benefits to setting up an EOT. 

Firstly, for the shareholders, any transfer of shares into the EOT are free from capital gains tax.

There is also the opportunity to pay tax-free cash bonuses of up to £3,600 per year, per employee.

You have to make sure that the trust takes on and retains a controlling ownership of the business (> 51%). 

EOT and succession planning

When you exit your business, you usually have the following options: 

  • sell the business to a third party
  • pass it over to a family member
  • allow the management to take over

Business owners that want to pass the business on to their employees have often used Enterprise Management Incentives (EMIs) or other share incentives, where they have given their management team or select employees shares.

EOT is an alternative to EMIs, where the shares are sold to a trust rather than directly to the employees. Because of the tax benefits, this is a great way to pass the business over to employees without incurring a Capital Gains Tax charge.

What are the advantages of using an EOT for succession planning?

The advantages of using an EOT for succession planning are:

  • there is an immediate purchaser for the trading company where previously the employees may not have had sufficient funds to acquire the business
  • no capital gains tax on the seller shareholders with the sale of the shares taking place on a ‘no gain / no loss’ basis
  • enables succession in family companies where there isn’t anybody in the family who wants to continue with the business
  • encourages employees to take a more active and constructive interest in the business
  • provides some flexibility on whether the current shareholders sell all or some of their shares (subject to the limits required by the controlling interest and the limited participation requirements)
  • the current owners can remain as directors of the business and receive market rate remuneration
  • companies owned by EOTs can pay tax-free cash bonuses to their employees of £3,600, although NIC still remains payable

Disqualifying events

It is important that no disqualifying events occur after the sale of the shares to the EOT. Disqualifying events occur if:

  • the company does not meet the trading requirement
  • the EOT does not meet the all-employee benefit requirement
  • the EOT does not meet the controlling interest requirement
  • the participator fraction exceeds 40%
  • the trustees act in a way that the all-employee benefit requirement does not permit

If you want to discuss whether EOT ownership is right for your business, book a call with one of our expert advisers today.

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