Insights

What are Employee Ownership Trusts?

The Employee Ownership Trusts (EOT) is a scheme offering promising outcomes to businesses and their employees. In essence, Employee Ownership Trusts are vehicles through which company shares are held on behalf of employees. By enabling a majority of shares to be sold to a trust, they serve as a practical and appealing solution for business owners contemplating retirement or seeking to exit their business whilst preserving its legacy.

The EOT Advantage

The appeal of Employee Ownership Trusts lies in their ability to provide significant advantages for both the outgoing owners and their workforce. Business succession planning through EOTs is a tax-efficient strategy as it provides complete Capital Gains Tax (CGT) relief on the sale of shares, provided at least 51% of the company's share capital is sold to the trust. This incentive, combined with the potential for Income Tax-free profit distributions to employees, makes EOTs an attractive avenue for transitioning business ownership.

Bonuses of up to £3,600 per employee per annum can be distributed as tax-free profit-share by the EOT-controlled company, although National Insurance still applies. Enterprise Management Incentive (EMI) and Share Incentive Plans (SIP) for direct employee ownership also offer tax benefits.

Moreover, transitioning to an EOT ensures that the business remains intact, with no immediate obligation for employees to fund the purchase of the company shares. This way, Employee Ownership Trusts protect the company culture, maintains job security, and encourages a shared sense of ownership leading to increased productivity and loyalty among staff.

EOTs: A Blueprint for Business Succession Planning

In the context of business succession planning, the EOT model shines as a strategy that not only takes care of the financial aspects but also addresses the human element of business transitions. It promotes a culture of collective responsibility, and encourages employees to have a vested interest in the success of the business. By ensuring that the people directly involved in the business have a say in its future, EOTs create a structure that is both sustainable and favourable for growth.

Implementing an EOT as part of business succession planning involves several key steps, including valuation of the company, securing professional advice, and setting up the trust. It is crucial to remember that every business is unique, and so, the process must be tailored to suit the specific needs and circumstances of the business.

What types of EOT’s are there?

• Indirect Employee Ownership:  Employees do not directly own shares in the company. Instead, they are beneficiaries of the trust, which owns the controlling shareholding. This method is particularly suited to businesses with a high staff turnover and a large number of employees who wish to have a tax-efficient profit share.
• Direct Employee Ownership:  Facilitates direct ownership of shares by employees, usually in association with a statutory tax-advantaged share plan over shares in the ultimate parent company. Employees can either purchase or be gifted shares, potentially tax-free, under a Share Incentive Plan (SIP). This model is commonly used when there's a desire to encourage employee retention and reward business growth.
• Hybrid Model: A blend of trust ownership and direct employee share ownership. In this model, retiring vendors sell their share interests to the EOT initially, and then over time, some of this interest is transferred to employees. This model typically suits businesses where the emerging new managers desire a real stake in the company but there is a wish by original founders to preserve independent control.

To learn more about how Evoke Management can help your business with succession planning and transferring to an Employee Ownership Trust, visit our ‘Business Succession Planning’ page or book a free 30-minute consultation here.