Employee Ownership Trusts
Key Contacts: Christian Farrow
Author: Nia Workman
What is an Employee Ownership Trust?
An Employee Ownership Trust (EOT) is a trust set up by existing company owners for the benefit of all its employees. The EOT becomes a majority owner of the company (meaning that it owns over 50% of its shareholding). EOTs do not give employees a direct share ownership, rather they own the company for the benefit of all its employees collectively.
In 2012, the UK Government undertook a review of employee ownership (the Nuttall Review), which aimed to promote diversification of the economy by encouraging employee ownership. As a direct consequence, the Finance Act 2014 introduced certain tax reliefs to incentivise companies to become EOT owned, and for individuals to sell their controlling interest in a company to an EOT.
What tax reliefs are available for businesses that form EOTs?
For shareholders, the significant advantage is that disposals into an EOT can be made free of capital gains tax and inheritance tax;
For employees – companies owned by EOTs can pay employees bonus payments of up to £3,600 per year free of income tax; and
For companies– corporation tax deductions to the value of any annual bonuses paid to employees.
What do businesses need to know before establishing an EOT?
Setting up an EOT is no small feat and several key factors should be considered before embarking on the process:
- Who will be the trustee?
There is the potential for conflict of interest if an employee or director of the company is also a trustee of the EOT.
- What is the market value of the shares to be acquired by the trustee?
This may need to be determined by an independent valuer.
- How will the trustee raise the funds to acquire the shares?
You should establish whether the company will lend money to the trustee or whether the trustee will borrow money independently from the company.
Ultimately, with the correct guidance, setting up an EOT can provide many benefits to both exiting shareholders and a company’s employees. If you would like discuss EOTs in more detail, please contact our corporate team.