Employee Ownership Trusts
Protect your staff’s future
As a business owner are you looking for a tax-efficient method to pass your business on?
You can pass your company to key management and employees tax-efficiently through an Employee Ownership Trust (EOT).
What is an Employee Ownership Trust?
Employee Ownership Trusts were created by the Government in 2014 to enable company owners to dispose of their companies to their employees in an advantageous way. This is now the largest sector for private company sales in the UK, with 5% of sales being achieved this way. The EOT sector has doubled since 2020 and by December 2022 it was recorded at 1030 businesses.
An EOT enables a company to become owned by its employees via a ‘Trust’. The owner can sell their company to their employees at full value, tax-free. Existing owners can remain involved in the business (and be remunerated) and retain ownership of some shares should they wish, thus enabling them to help plan for the future, avoid dramatic changes and protect any deferred element of the consideration.
Eligible employees will indirectly own all or the majority of the business and receive financial benefits.
- Minimal Disruption – the business continues without great change.
- Job Protection and Staff Retention – evidence shows that there is greater staff retention when employees have a meaningful stake in a business and a survey in 2020 showed that productivity was typically 7.1% higher in EOT companies.
- Taxation – Owner and Employees – The main advantage to company owners is that they can see tax-free. There is no CGT on a sale to an EOT. For example, if an owner is selling for £2m, typically the first £1m would be taxed at 10% and the 2nd £1m at 20%, creating a tax costs of £300k. An employee can be paid £3,600 tax-free (but not NI free). This is a major incentive to employees and a potential cost saving to the company.
- Preparation is everything
- Create an engagement plan
- Map out the company fundamentals
- Recognise the different style of leadership required
- Involve your employees at the right time
- Choose the right trustees
The most famous example of an EOT is the John Lewis Partnership where all employees are owners of the company. This can be done to avoid a takeover of the company leading to staff redundancies. In essence an EOT is a way to protect your staff’s future.
There is no restriction to what type of company or who can do this so this can benefit any company and company’s employees.
Having an EOT can be a good way to have a succession plan for your business – many company owners are unsure of what they will do in the future and EOT can give you guidance and a plan.
You can use an EOT to see your company grow after you decide you have had enough – by giving the employees the ownership of the company it will build enthusiasm and drive off expertise they already have in the industry to help the business grow.
Not-for-profit businesses – most commonly, if you own a business of this nature, as there is no profit, there is no need for one person to be in control. By inviting employees to participate in ownership, it draws on knowledge and help of willing and like-minded people.
- Must be a trading company.
- The EOT must have a majority control.
- Current shareholders cannot make up 40% of new owners. After EOT Profit must be split evenly once the EOT is complete.
The most famous example of an EOT is the John Lewis Partnership where all employees are owners of the company. This can be done to avoid a takeover of the company leading to staff redundancies. In essence an EOT is a way to protect your staff’s future.
There is no restriction to what type of company or who can do this so this can benefit any company and company’s employees.
Having an EOT can be a good way to have a succession plan for your business – many company owners are unsure of what they will do in the future and EOT can give you guidance and a plan.
You can use an EOT to see your company grow after you decide you have had enough – by giving the employees the ownership of the company it will build enthusiasm and drive off expertise they already have in the industry to help the business grow.
Not-for-profit businesses – most commonly, if you own a business of this nature, as there is no profit, there is no need for one person to be in control. By inviting employees to participate in ownership, it draws on knowledge and help of willing and like-minded people.
- Must be a trading company.
- The EOT must have a majority control.
- Current shareholders cannot make up 40% of new owners. After EOT Profit must be split evenly once the EOT is complete.
For the company and previous owners
Total Capital Gains Tax (CGT) Exemption on sale with no risk of CGT clawbacks. This saves you 10% CGT at Business Asset Disposal Relief (BADR) rates.
For the employees
You can be paid an annual tax-free bonus of £3600 per annum.
Folkes Worton LLP Chartered Accountants are members of the Employee Ownership Association
Ensuring we provide a quality Employee Ownership service for the future of your business
Please contact our team on 01384 376 964 to find out more.