Employee Ownership Trusts

What is an Employee Ownership Trust (EOT)?

The EOT was introduced by the Finance Act 2014 as a particular type of EBT that meets certain statutory criteria. This works in conjunction with certain tax benefits that became available for both companies and individuals. The purpose was to encourage the creation of employee-owned companies as an alternative to a trade sale.

Why consider employee ownership?

  • Employees are more engaged with and committed to the company
  • Likely to improve productivity and performance
  • Builds a shared culture and collaborative way of working
  • Can be a solution to ownership succession
  • Owners can have a partial exit but stay involved
  • Owners can allow employees to continue their legacy
  • Tax reliefs for retiring owners and employees

What tax reliefs are available?

  • The initial sale of shares to the EOT is exempt from capital gains tax (CGT) 
  • The company under EOT control can pay bonuses to employees of up to £3,600 per year per individual free of income tax
  • EOT has the same inheritance tax reliefs (IHT) as other employee trusts

Potential drawbacks

  • There are significant tax disincentives to a subsequent sale of the company, so careful consideration must be given to the long term plans
  • The EOT must obtain and retain a majority stake (the ‘controlling interest’ requirement) so trustees must hold more than 50% of shares and voting rights of the company
  • The ‘all employee benefit’ requirement means it must apply to all employees on the same terms, so no discretion as to participation or terms
  • The ‘trading’ requirement – must be a trading company or holding company of one
  • There are stricter rules and criteria than an EBT or other trusts
  • Not suitable for all companies

Establishing an EOT

Usually, the EOT or the trust company established to hold the shares as a corporate trustee will acquire a controlling interest in a company, purchasing shares from individual shareholders. Usually, payment will be on deferred terms, although shares may on occasion be gifted. There will need to be a valuation exercise to ensure the correct value is being paid. 

There is no CGT payable but the trustees do need to justify the price they paid for the shares and there must be a realistic prospect of being able to make repayment. There will be a sale and purchase agreement detailing the terms of the sale. Articles of association will need to reflect the shares, whether they are all the same class or different classes. The trust deed will be a key document and will set out how the trust is to work, how assets/funds are to be held, how they can be used, and how distributions can be made. 

If you would like more information or if your have any questions or queries relating to the above, please contact Rachel Owen from our Commercial and Commercial team on 0161 926 1579 or rachelo@mlplaw.co.uk to receive expert legal advice for your business.