Employee Ownership Trust

Employee Ownership Trusts or EOTs are a unique way to sell or transfer a business into an employee-owned model with shares held in a trust on behalf of and for the benefit of all the employees.

What is an Employee Ownership Trust (EOT)?

An Employee Ownership Trust offers a highly tax efficient way for a company’s owner to sell a controlling stake of a business to its employees and place the business into the indirect ownership of employees to become an Employee-Owned Business (EOB). EOTs are often used as part of an exit or succession strategy for the business owner.

The Employee Ownership Trust initiative was created by the government in 2014 to encourage employee ownership as a structure to hold shares in a company on behalf of all the employees. Shares in the company are held within a Trust as a clear framework for employee ownership for the benefit of all the company’s employees.

The transaction provides significant tax advantages for the seller to obtain relief of 50% from capital gains tax and allows the business to pay annual tax free bonuses to employees of up to £3,600 per employee.

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How do EOTs work?

To set up an Employee Ownership Trust (EOT), the shareholders in the company will need to transfer a majority of the business’s shares into the trust. As a result, the EOT must have a controlling interest in the company of greater than 50%, including all share rights such as rights to votes, dividends and capital.

The trust has a number of Trustees whose role is to represent the interests of employees. The trustees are not responsible for the day to day running of the company – that remains the responsibility and role of the board of directors. However, trustees can oversee the management and leadership of the company and may interject if management are not considered to be acting in the best interests of employees as a whole.

01 The company is valued for the purposes of the EOT transaction
02 The EOT borrows money from the seller/s (vendor loan) with/without third party financing & with a company guarantee
03 The lenders take a charge over the company’s assets
04 The shareholders sell between 51% and 100% of the shares to the EOT for cash and a vendor loan note. Sellers can obtain relief from Capital Gains Tax at 50% on the shares sold in the year the EOT acquires the shares. Further details on CGT payments can be found in our blog
05 The EOT pays for the shares with cash and vendor loans
06 The loan due to the seller/s from the EOT is repaid over time using contributions from post-tax profit made to the trust by the company
07 As an incentive to align interests, the company may issue shares or options to key managers and employees; the EOT must always hold the majority of shares
08 Employees are eligible to receive income tax-free bonus payments up to £3,600 per employee per annum; bonuses are not mandatory.

How is an EOT funded?

If the company has cash reserves at the time of the sale, it’s common for an initial cash payment to be made as part of the transaction. CGT will be due on the full value of the EOT transaction i.e. on both any loan and any initial cash payment, although relief from CGT can be obtained at 50%.

The most common way to fund an EOT transaction is through four steps:

01 The EOT borrows money using a loan from the outgoing business owner, supported by a company guarantee. Third party financing can also be used.
02 The lender takes a charge on the company’s assets.
03 The company makes contributions to the EOT to pay interest and fees and to repay the loan (this must be a contractual obligation).
04 The loan to the EOT is repaid over time from the future post-tax profits of the business.

How RM2 can help you

We focus entirely on employee share ownership, in all its forms, and we’ve been doing this for over 25 years. Advising over 2,000 clients on their employee ownership solutions and establishing over 125 Employee Ownership Trusts since introduction in 2014, our experienced team is here to help you make the right informed choice. We’ll walk you through the steps, tailoring the right employee ownership solution for you and your business.

Feasibility study

This will demonstrate how an EOT can work for your company and will help you form a view of the fair value of your company, how the financing would be structured, and how quickly you can expect to be paid.

EOT Transaction

If you decide to proceed, we can help with the full transaction including preparing the legal documents, arranging for a formal valuation to be prepared, and project management throughout.

Hybrid Ownership

If required we can also help you implement an employee share plan to incentivise and reward key people, or give all employees a greater feeling of ownership and sense of community dependent upon the share plan chosen. Take a look at what Hybrid Ownership involves.

Compliance & Support

Once your business has transitioned to EOT ownership, our team can also provide ongoing compliance and support to ensure your EOT remains compliant. This service includes managing Companies House filings and any relevant HMRC registrations.

Why would I consider selling to an Employee Ownership Trust?

Employee Ownership Trusts can be a good choice for business and their stakeholders facing different circumstances. It’s worth considering shifting into an EOT if you:

Are looking for a smooth exit strategy that protects your legacy and your employees
Can’t find the right trade sale or management buyout solution
Are an employee of a business and want to find a way to buy out the owners for everyone’s benefit

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Martin Rogers
Managing Director, Combined Flooring

For us, the journey has been almost perfect in that the timing was ideal. Selling the business would have risked having inexperienced people running the business and unhappy employees. The EOT allows a seamless continuation of the business with the knowledge the employees will be rewarded in due course.

What are the benefits of an  Employee Ownership Trust?

Selling your business to an Employee Ownership Trust can offer a variety of benefits to the sellers, the employees and the business as a whole.

Secure your company’s future.

If you’ve spent years building your team and business, you’ll no doubt want both to continue to thrive and grow. When you place your company into an Employee Ownership Trust you can be in control of the timing of the transaction and succession plan.

The tax-efficient way to sell a business.

Transferring the controlling stake in a business into an Employee Ownership Trust can provide relief to the seller of 50% from any Capital Gains Tax (CGT) that would be due on the sale. This can make the sale significantly more valuable to the outgoing owners.

Be involved after the sale of your business.

Selling to an EOT allows for flexible exit strategies. Retain a minority stake, join the board, or consult – ensuring a smooth transition and ongoing support for your company's future.

Minimise complexity and timescale.

The transaction is non-adversarial. There are no third-party negotiations as it is effectively an internal transaction which is normally quicker and much less disruptive than a traditional trade sale or management buyout.

Capital Gains Tax Relief

Individuals who sell to an EOT benefit from 50% relief from Capital Gains Tax (CGT), provided they have sold a controlling stake in the business. This can therefore significantly increase the effective value of the sale to the outgoing shareholders.

Income Tax Free Bonus

Companies owned by an EOT can pay each employee an annual bonus payment of up to £3,600 free from income tax. The bonuses are subject to National Insurance Contributions.

Get a smooth transition.

Placing a business into an Employee Ownership Trust can allow for a gradual, carefully planned and managed transition, helping to keep the business running effectively on a day-to-day basis during the transition.

Improve resilience.

Employee-owned businesses are more likely to grow their workforce and enjoy greater job security. They're over 50% more likely to expand and five times less likely to face redundancy. Research from People Powered Growth Report, published by Employee Ownership Association.

Increase productivity and profit.

Employee-owned businesses (EOBs) boost productivity by 8-12% and are 25% more likely to see profit increases. Research from People Powered Growth Report, published by Employee Ownership Association.

Secure previous owners’ experience and expertise.

Even after exiting, owners can ensure a smooth transition by staying on. Their continued expertise and connections benefit the company while empowering the new leadership team.

Directly reward high performance.

EOTs offer tax-free bonuses up to £3,600 per employee, rewarding their efforts. Key employees can receive further incentives like direct share ownership and dividends, boosting individual wealth.

Maintain culture and values.

When a business is sold, this can often lead to significant uncertainty for the employees, including the prospect of redundancies and concerns over the way the culture or values of a business might change. Employee ownership can be a way of allowing a company to stay independent and avoid these issues.

Increase motivation and engagement.

73% of businesses have reported increased job satisfaction with 83% reporting increased employee engagement and motivation since adopting the EO model. Research from People Powered Growth Report, published by Employee Ownership Association.

Find out more about how Employee Ownership Trusts are making a positive difference to businesses, including the largest UK companies engaging in EOTs.

Case study

Factsheets

Hybrid Ownership

Blog

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Discover how we can help you own the future success of your business with Employee Ownership Trusts and Employee Share Schemes.

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