Employee Ownership Trust – Is it an option for you and your business?

With the news that Carlton Bingo becomes the latest well known company to become employee owned, is it an option to consider for you and your business?

Employee Ownership Trusts (EOTs) are an established mechanism aimed to promote employee ownership by giving business owners the opportunity to sell their shares to an employee owned trust free from capital gains tax.

In summary, a company seeking to transition a controlling (more than 50 percent) ownership to an EOT can consider three methods:

Indirect employee ownership – the employees do not own shares in their employer company directly, they are beneficiaries of the trust which owns the controlling shareholding. This method of ownership is suited to businesses with higher staff turnover and a larger number of employees who desire tax-efficient profit-share.

Direct employee ownership – the employees directly own shares, typically in conjunction with a statutory tax advantaged share plan over shares in the ultimate parent company.

Hybrid Model – This is a combination of trust ownership and employee direct share ownership. Typically, retiring vendors sell their share interests to the EOT when it is first established and then over time some of this interest is transferred to employees. The hybrid model suits businesses where the emerging new managers desire a real ownership stake in the business but there is a desire by original founders to preserve independent control of the business.

Why set up an EOT?

• Allows an exit where there is no obvious third party purchaser.
• Can provide a quick and streamlined exit route for shareholders.
• Allows a tax free disposal by UK individual shareholders.
• Owner can retain some involvement (up to 49%).
• Share capital still available to incentivise management and key employees.
• Aligns the goals of stakeholders and employees.
• Improved employee retention and morale.
• Encourages innovation at all levels.
• Improved business performance by driving growth of stakeholder values.
• Employee ownership encourages employee engagement

Tax benefits:

• Owner: Disposals into the trust can be made free from capital gains tax and inheritance tax.
• Employee: The EOT can pay annual bonuses of up to £3,600 to employees free of income tax.
• Company: A corporation tax deduction for the value of the bonuses will be available to the company.

For a copy of our guide, please email leanner@mlplaw.co.uk. If you wish to speak to our experts at MLP Law for more information and professional guidance please contact our employment and business teams on corporate@mlplaw.co.uk