What is an Employee Ownership Trust and is it right for my business?

Employee Ownership Trusts (‘EOTs’) were introduced by the Government to encourage employee ownership, which has long been recognised as a way of boosting employee engagement and productivity.  

Since their introduction, many high-profile companies have successfully embraced employee ownership, including the organic veg box company Riverford, Richer Sounds Ltd and Go Ape.  

Many business owners are now considering EOTs as a part of their business succession and exit strategies, taking advantage of the generous tax reliefs on offer. 

What are the main benefits?

• Existing shareholders can sell their shares to an EOT capital gains tax free. 
• EOTs can enable an exit for existing shareholders where there is no obvious third-party purchaser, and secure the future of the business.
• Existing shareholders can retain some shares (up to 49%) and can remain on the Board of Directors.
• Once in place, the EOT can distribute an annual income tax-free bonus of up to £3,600 to eligible employees.
• Employee ownership can foster increased employee engagement and may provide a competitive advantage with respect to attracting and retaining staff.

How does an EOT work?

EOTs do not involve direct share ownership by employees. Instead, a controlling interest in a company is transferred to an EOT and held for the benefit of the company’s employees.

The EOT is usually established with a corporate trustee (the Trustee Company). The existing shareholders will sell their shares to the EOT under a share purchase agreement for an agreed sales price, determined by an independent market valuation. 

Unless third party finance is obtained, it is common for the purchase price to be funded by the company making contributions (or “gifts”) to the EOT to enable it to meet its payment obligations.

If structured correctly, contributions are tax-free in the hands of the EOT, although the company would not obtain corporation tax relief for these payments.

What are the main qualifying conditions? 

• The company must be a trading company or part of a trading group.
• The EOT assets must be available for the benefit of all eligible employees on equal terms (although trustees can distinguish between employees on the basis of remuneration, length of service and/or hours worked).
• The EOT must hold a controlling interest in the company.
• The number of continuing shareholders who are directors, office holders or employees (and any persons connected with such directors/office holders/employees) must not exceed 40% of the total number of employees within the company or group. 

Other considerations:

• Becoming employee-owned is a significant change for any business and is not easy to reverse once the EOT is in place. 
• Deferred consideration owed to the selling shareholders could be at risk if the company fails, or does not perform as well as expected.
• The scope to focus incentives on key management may be more limited with an EOT, although Enterprise Management Incentive (EMI) share scheme options or other tax-advantaged share schemes can still be granted by a company under the control of an EOT. 
• Ongoing compliance with the EOT qualifying conditions will be required. If the conditions cease to be met after implementation, a ‘disqualifying event’ may occur resulting in tax liabilities for the selling shareholders or the EOT. 

Further information

If you would like to discuss how an EOT could work for your company, please contact a member of our tax team.

EMI share options

See also our series of articles on EMI share option schemes:

• What are the ongoing compliance requirements after granting an EMI option?
• Why should I implement an EMI scheme over a cash bonus?
• What are the advantages of agreeing an EMI valuation?
• The Top 5 reasons why EMI share option schemes go wrong
• Pros and cons of using Share Scheme Platforms to implement an EMI scheme