Employee Ownership Trusts – a beginner’s guide to the hottest topic in town

What is an Employee Ownership Trust?

An Employee Ownership Trust (EOT) is how the ownership of a company can be indirectly moved to its employees in a tax efficient manner. EOTs were introduced by the government in 2014, to incentivise more shareholders to transition to an employee-ownership model.

An EOT is essentially a particular type of employee benefit trust and must first be set up for the benefit of all qualifying employees. The existing shareholders can then sell a controlling share in the company (anywhere from 51% to 100% of share capital) to the EOT (or its corporate trustee to be precise) in return for payment (the method being dependent on the funds available). Therefore, the EOT holds a controlling stake in the company on behalf of its employees.

Tax efficiency…

Provided certain statutory criteria are met, EOTs provide generous tax advantages for both the exiting shareholders and the company itself. A key benefit is that, subject to meeting the criteria before and following the transaction, the exiting shareholders could qualify for an exemption from capital gains tax (CGT) on any gain arising from the disposal of their shares.

Once established, all employees can then benefit from the EOT (based on certain criteria including hours worked, length of service and level of remuneration) as the company’s profits are gifted up to the EOT.

Companies controlled by EOTs can pay tax-free cash bonuses to their employees of up to £3,600 per employee per year (but not NIC free).

Not all about the tax…

A transition to employee ownership provides existing shareholders an exit route which yields full market value. However, it is more than just selling the business to a new owner; it can have a transformative impact on how the business operates, with employees brought into the heart of decision making.

Employee-owned businesses achieve higher productivity, are more resilient to economic downturns, and have more engaged workforces. According to the latest Employee Ownership Top 50 report*, they typically enjoy:

• Stronger sales – up 4.3%, compared to a UK average of 1.2%
• Better productivity – up 6.9%, compared to a 1% fall overall
• Lower debt – 66% have no debt
• Growing profits – up 5% on average

Been there, done it!

If you’re considering employee ownership, you’re in good company. Aardman Animations, Riverford Organics, Wildlife World and Lush are amongst the successful businesses to have embraced this increasingly popular model of ownership.

This year we have already assisted several companies with making the transition.

Not a panacea

We would strongly advise that company owners considering transitioning to employee ownership have a full discussion on the pros and cons – it does not work in every situation and does require a strong management team and cultural fit.

PKF Francis Clark

If you think that a transition to employee ownership is something you would like to explore further, please refer to our handbook Employee Ownership: a guide to transitioning. Alternatively you can contact your usual point of contact at PKF Francis Clark.