Employee Ownership Trusts are booming
The current rate of growth in EOTs is 50% per annum, reflecting keen interest from business owners in this flexible succession solution. Before EOTs, business owners would be advised to sell their company to trade buyers or, exceptionally, to private equity buyers in a process that is often stressful, costly and distracting for the business. Trade sales might maximise sale proceeds but they often leave business owners regretting the loss of their legacy and feeling uncomfortable about the outlook for former colleagues.
Thanks to two eye-catching tax reliefs, EOTs are fast becoming a mainstream exit route for business owners. Shareholders selling a controlling interest in a company to an EOT (whether individually or jointly with other shareholders) can claim full exemption from capital gains tax. Owners can exit at a rate that suits them and the business. And if cash bonuses are paid by the EOT-controlled business, employees don’t pay income tax on the first £3,600 if the bonuses are paid to all employees on similar terms.
The national survey of EOTs was started by RM2 in 2015 to track progress with this game-changing structure. The EOT legislation is due to be reviewed in 2019, so it is helpful if the employee ownership sector has good data on numbers and market practice. So far it appears that the legislation is fully meeting the objectives set for it by government. You can get full details of the survey here.
Although the survey covers only newly established EOTs, RM2 also tracks “grand-parented EOTs”. These are long established employee trust owned companies that predate the EOT legislation, such as the John Lewis Partnership. If they behave and operate like EOTs, these companies can deem their employee trusts to be EOTs, thereby enabling the payment of tax-free employee bonuses. If the grand-parented EOTs are added to the newly established EOTs, we calculate that EOT businesses already represent as much as 45% of the total employee ownership sector, measured by employee numbers, reinforcing the significance of this new structure.