Could an Employee Ownership Trust (EOT) be the answer to your exit predicament?

Could an Employee Ownership Trust (EOT) be the answer to your exit predicament?

Employee Ownership Trusts (EOT) are a government initiative, launched in 2014, to encourage the so-called “John Lewis” model of employee owned companies.

The John Lewis model

While JL is the best-known example there are numerous other large companies who are also employee owned such as Aardman Animation (of Wallace and Gromit fame), Riverford Organics and Richer Sounds.

Why set up an EOT?

There are two generous tax breaks which are relevant:

  1. Those selling their shares to an EOT obtain relief from capital gains tax.
  2. Once a company is owned by an EOT it can pay annual bonuses to employees free of income tax (up to a limit of £3,600).

However, there are certain criteria which must be met to qualify for these tax breaks, including:

  • The EOT must hold more than 50% of the company’s shares (i.e. it must have a controlling interest).
  • All employees must benefit on the same terms.

Planning for business succession

Owners can face difficulties when planning their own exit if a trade sale is unlikely or raising the funds for an MBO by management is not realistic.

In addition, questions of succession may be problematic. Maybe the owner does not have children, or they may feel strongly that they do not want to pass their shares on through the generations.

Some owners may be motivated by even more altruistic motives, wanting to reward their staff for their hard work and may not wish to be paid for their company shares (or some of them).

How it works

An EOT will acquire between 51% and 100% of the shares in a trading business. Note that a company which has significant cash, land or other investments may not be a trading company.

Shares are then held on trust for the employees: they do not hold shares directly, so cannot sell them, but indirectly via the trust. The EOT (not the company itself) is run by trustees who are concerned to ensure the employees benefit appropriately from the running of the company.

There are other advantages

In addition to the tax advantages, research suggests that employee owned companies perform better, retain staff for longer and have lower levels of absenteeism than other companies.

Shareholders can continue to work in the company after shares are transferred to the EOT. This means that owners can transition gradually to retirement if they wish, which might not be possible if their shares were sold to a third party.

The existing management team of the company continues to run it after the transfer of the shares to the EOT, again something which may not happen on sale to an ordinary buyer.

How can we help?

Nexa’s tax specialist Femi Ogunshakin can answer your questions if you’re thinking about an EOT and want to find out more. Do get in touch for a confidential and no obligation chat!