Employee Ownership Trusts

Employee Ownership Trusts

What is an Employee Ownership Trust (EOT)?

An EOT is a special form of employee benefit trust, introduced in September 2014 to encourage more companies to set up an ownership structure similar to the well-known “John Lewis” model.

EOTs can create an effective means of succession planning and an alternative to the more conventional exit routes for shareholders, such as a trade sale or an MBO. With appropriate preparation and employee engagement, the EOT model can help deliver a robust, diverse and employee-centred business structure, while affording attractive tax savings to shareholders.

How does an EOT work?

The idea is that the existing shareholders sell a controlling stake (> 50 %) of the company to the EOT, which holds the shares on behalf of the employees.

The sale takes place at market value, and funding may be either by the provision of external finance or internally through the company generating the funds to repay the exiting shareholders over a period of time.

There is an “all employee benefit” requirement for the EOT, with no scope for anyone except those with very minimal service to be excluded.

There will generally be some form of ongoing employee representation at both trustee and Board level.

What are the benefits?

When shareholders sell the controlling interest in a company to an EOT that meets certain qualifying conditions, they should be able to claim a 100% CGT exemption – i.e. no CGT charge should arise with a successfully implemented EOT structure.

Employees can receive a bonus of up to £3,600 each year tax free, and the company gets tax relief on this.

Encouraging employees to see themselves as business owners can be a powerful tool for recruitment, motivation and retention.

Areas to consider

Careful thought needs to be given to the impact the EOT may have on the running of the business – too little genuine representation for the employees at a senior level may contradict the point of collective ownership, while too much may complicate the decision-making process.

An EOT requires a genuine appetite to do something positive for the employees, rather than just to achieve a tax efficient exit, and the time and costs involved will reflect this.

Employee ownership examples

The Employee Ownership Association (EOA) notes that more than 350 businesses have now adopted the EOT model, with at least 50 more preparing to follow suit. Recent converts include Riverford, the organic vegetable box company and Aardman, the Bristol-based animation studio behind Wallace & Gromit. They join well-known names including John Lewis, Richer Sounds and ‘Tiptree’ jam maker, Wilkin & Sons, in becoming employee owned.

How can Azets help?

Azets has worked closely with a number of businesses in establishing Employee Ownership Trusts and is well placed to provide advice across the full range of key areas such as taxation, independent valuations, funding options and practical transactional support.

If you feel the idea of collective ownership might suit the ethos of your business, or would like further information on any of the areas raised above, please contact a member of our Tax Team or get in touch with your local Azets contact.