What is an Employee Ownership Trust?
An Employee Ownership Trust (EOT) is where all employees have a stake in the company and a share in the profits.
In an EOT business, the shares are paid for from the vendor company’s reserves and future profits. When new staff members join, they become members of the EOT automatically after an agreed-upon qualifying period.
Why Does an EOT Work for the Current Owner?
A significant advantage of an EOT business is that it is currently the only way a vendor can take the sale (of their business) proceeds tax-free. No capital gains tax or income tax is applicable for qualifying companies.
The transition to an EOT business is not a case of a simple form. You will need to get revenue clearance and have a valid, robust valuation. Assuming all is in order, then zero tax will apply. However, it’s important to note that this is only on the first tranche you sell, and you must sell a controlling interest, i.e. 51%. If you plan on selling your shares in stages to the EOT, any subsequent transfers will create a usual capital gains tax charge. It is essential to take professional advice on these matters. Carefully consider the positive and negative details of tax-free sums versus forgiving control of your business.
By retaining some shares, there is the possibility that the shares will increase in value for a secondary disposal. In such cases, a tax-free sum must be offset against any perceived value increase.
Why Does an Employee Ownership Trust Work for the Team?
The benefits of employee ownership trusts are substantial, especially regarding the team. Money aside, passing the business ownership to those who have helped build it and will continue to cherish it is an excellent succession planning strategy. These employees share your business values and have demonstrated loyalty to them. This is important as the new beneficiaries do not need to make any personal financial commitment at all, and you, as the business owner, know that the legacy business will continue.
An employee ownership trust works to support the growth of a business on a number of levels:
- The business’s ownership passes from the vendor to the staff at zero cost to the employees.
- Ensuring that the business is owned by a team of people who are committed to its values and its success.
- An employee ownership trust is an excellent alternative to a management buyout (MBO). An MBO can often be held back due to the financial commitment needed by the management team.
- The staff take a share of the profits and can access up to £3,600 income tax-free dividend each year.
- The vendor does not have to sell to an unknown owner, which could disrupt the business services or its clients.
- The complexity of a trade sale is avoided, and employees can share in the growth of the business.
To Conclude
Whilst an employee ownership trust comes with great opportunities for teams, staff may feel apprehensive about how the scheme works, how it affects their tax, and what they need to do. This is why it is essential to approach an EOT transition holistically. It’s not enough to only cover the financials, legal and tax.
To ensure a smooth transition, you also need an employee engagement strategy tailored to your business and your team. Communication is key, and a well-thought-out employee engagement strategy is essential.
When choosing an EOT consultant, ensure that the advisors are experienced in managing EOT transactions and understand the process inside and out. A full-service approach to EOT gives your business and team the opportunity to continue to succeed.
Find out more about employee ownership trusts by downloading our free guide, visiting our service page to learn more or getting in touch to discuss further with a member of the team.