The Power of Employee Ownership Trusts

Published 31st July 2024

What is an employee ownership trust (EOT)?

Employee Ownership Trusts (EOTs) were introduced by the Government in 2014 to provide a tax-efficient structure for the sale of a controlling interest in a trading company to its employees.

The flexibility and tax advantages of EOTs have helped them gain traction as an exit strategy in recent years, especially given the current economic outlook.

Using EOTs for succession planning can allow a business owner to pass on the company to its employees for full market value without incurring a CGT charge. This method of sale can provide an alternative to external sales, management buy-outs, or private equity-backed buy-outs.

An EOT option is certainly worth considering for a private company owner wishing to retire and looking for an alternative to a trade sale. It places the business in the hands of the people who understand it, have a strong personal commitment to its long-term success and are motivated by their ownership to make it prosper.

The advantages of using a qualifying EOT for succession planning are as follows:

An EOT awards recognition for the contribution of a workforce yet maintains the culture and legacy already created. In turn, the business will find an increase in employee retention, and employment opportunities will be more attractive. Although the employee structure and day-to-day operations remain the same, the EOT gives employees the ability to contribute to business decisions.

Many family-owned or SME businesses do not have a succession plan in place so opting for an EOT removes any pressures should an illness or financial problem occur and in the future should the business choose to grow the process is proved to be more efficient with lower costs.

How can an EOT be structured?

  1. Tradeco makes a contribution to EOT, alternatively, EOT could borrow from a third-party lender.
  2. The vendor receives initial day 1 cash and/or deferred consideration for the share purchase.
  3. The vendor sells a minimum of 51% of the equity in Tradeco.
  4. Employees may receive a tax-free bonus of up to £3,600 per year.
  5. Key employees may be offered share options or equity as a wider/specific incentivization package.

 

Key Benefits

 

EOT Conditions

HMRC Consultation on EOTs

HMRC opened a consultation period from 18 July 2023 for 10 weeks providing the opportunity for input and comments on the proposed reforms;

The aim behind the proposals is to ensure that the focus remains on the targeted objectives of an EOT, in terms of rewarding employees and encouraging while preventing the misuse of tax advantages for unintended purposes.

The types of proposals consulted on include:

Other considerations

The outcome of the consultation is still pending however with the newly appointed Labour government we expect further limitations but for EOTs to continue to be widely supported.

 An incorrectly structured sale to an EOT can have adverse and unexpected tax consequences, therefore it is important to seek professional advice from an advisor with previous experience setting up EOTs before proceeding.

At Pierce we have experience implementing a sale to an Employee Ownership Trust, please do not hesitate to contact the Pierce Corporate Finance Team or Tax Director Dominic Ball on 01254 688100.

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