Employee share plans in EOT companies

For some business owners, selling all their shares to an Employee Ownership Trust (EOT) is the complete solution to their succession worries. 

Key benefits of selling to an EOT

Sellers pay no capital gains tax if they sell a majority shareholding to an EOT.  This means that the EOT now owns most or all of the company on behalf of the employees. One key advantage is that this can help ensure the company’s continued independence.   Once the sellers are paid off, the employees can benefit by sharing in the company’s profits. This can include getting annual income tax free bonuses worth up to £3,600 per employee.

Why might employee owners need extra rewards?

For many businesses, though, there is sometimes the need for a bit extra over and above that wider sense of ownership and profit share.    This can be particularly important when it comes to creating extra motivation for the next generation of managers.  They will be responsible for driving the company forward in its EOT journey, including achieving “financial freedom day” – paying off the vendor debt.

A business that is 100% owned by an EOT can still motivate and reward its employees through direct shareholding.  Just as is the case in any other private company, share plans can deliver additional target based rewards for employees.  That could include receiving dividends on shares on top of any profit-sharing arrangements.  Share plans in EOT companies will typically only deliver reward once the vendor debt has been repaid.

Share plans for some employees

EOT businesses can operate tax advantaged share plans such as Enterprise Management Incentives (EMI) and Company Share Option Plan (CSOP).   These are discretionary option schemes and are commonly used to reward key staff, including the next generation of managers.  The plans can also be offered to all employees in the group.

Share plans for all employees

EOT companies may also wish to consider using the tax advantaged all employee share plan, the Share Incentive Plan (SIP).  This has a number of details in common with the EOT, and may well be an excellent cultural fit for an employee owned company.

How RM2 can help

There are some particular rules that need to be taken into consideration when setting up an employee share plan in an EOT company to ensure that the tax advantages of the EOT itself are not lost or clawed back.  It’s also important to think about how employees might see a capital return on their shares when there is no particular sale event envisaged in the future. 

RM2 has advised over 100 companies on their EOT transitions, and the majority of our clients will implement an employee share plan post-transaction.  Our team is expert in designing a share plan that works for an EOT company, including helping deliver capital returns to employees.

If you think your EOT company could deliver even greater rewards to your employees, contact us on enquiries@rm2.co.uk and ask to speak to one of our specialist consultants.