Employee Ownership Trusts

Take five guide - Employee Ownership Trusts

Passing a business on to others through an Employee Ownership Trust (EOT) can be an attractive and tax efficient alternative to a conventional sale. Here are five steps to follow.


1. Understand the benefits of an EOT

An EOT is effectively a tax incentive to encourage employee ownership of businesses. As the name suggests, rather than selling to another individual or business, the business is sold to a trust for the benefit of all of its employees.

There are specific tax reliefs that apply to the sale of a business to an EOT that do not apply if you sell to a third party.

Aside from the tax breaks, owners who are passionate about the business they have built up also benefit from knowing their ‘baby’ is going to people who share their passion and will want to be good custodians of the company in the future.

Sales to EOTs are likely to move quicker than a sale to a third-party reducing time and stress to the outgoing owner.

You can remain involved with the business as a director receiving remuneration commensurate with your level of involvement.


2. Ensure that the qualifying requirements are met

The tax benefits of selling to an EOT are only available if the following conditions are met:

  • The company is a trading company or holding company of a trading group;
  • All employees must be able to benefit from the trust and on the same terms;
  • The trustees of the EOT acquire a controlling 51% interest in the business; and
  • No more than 40% of current shareholders will continue to own shares following the sale to the EOT.

You should consider whether your business is one which will meet the trading requirement and whether you truly want to be bound by these other criteria as part of your exit from the company.


3. Carefully choose your trustees

Trustees oversee the trust which holds the shares for the benefit of your employees – they are effectively the guardians of your employee-owned business.

Your trustees may or may not be the senior managers of your business. Alternatively, a trust company may be preferred so as to limit personal liability to any individual.

Whilst the directors of the business are responsible for the day-to-day running of the business, they are ultimately answerable to trustees who are the shareholders. As the name implies, a trustee should be someone you trust as a majority shareholder in the business you have built.


4. Communicate your intentions and listen to your employees 

The exit of a business owner, especially one established for a long time, can be an anxious time for employees. If you are planning to establish an EOT, communication is important. Do this as early as possible, so that you have discussions with the individuals you will involve in a timely way. Ensure they are on board with what they are being asked to do and that they share your vision of what will happen after you leave.

At an appropriate time, also consider how you are going to communicate your plans to the rest of your business. Explain the reasons for the creation of the trust and why you have chosen the new trustees, and any newly appointed directors.

You are far more likely to take your people on the journey to employee ownership with you if you treat communication as a two-way process. Listen to them, address any concerns they have, and be clear about any implications for them as individuals. As far as you can, keep them up to date on future plans for the business.

It is an option, though not a mandatory, to set up an Employee Council. This Employee Council is an elected, representative body which has significant power, principally being to appoint or remove the trustee. The governing documents may also require that this Employee Council should be consulted prior to trustees voting on company matters.

As mentioned, this is not mandatory in the process of setting up an EOT and whether to have one is a decision best left up to the outgoing business owner and his or her proposed successors.


5. Consider how involved you want to be going forward

The EOT sale model allows for outgoing owners to remain in a salaried directorship role. You should think about whether you feel the time is right for you to step away completely or whether the business is better off with you keeping a hand on the tiller for a little while longer during the transition period. No one answer will be right for everyone so this as much as anything should form part of the discussion you have with your senior team.


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