A short guide to Employee Ownership Trusts
When it comes to business disposals, an increasingly popular option is the Employee Ownership Trust. Corporate Finance Partner Linzi Wilson offers a short guide to this unique form of Employee Buy-out and the advantages for business owners and employees.
What is an Employee Ownership Trust?
In short, an Employee Ownership Trust (EOT) is a method of structuring an Employee Buy-out to offer benefits to both the current business owner and employees. Unlike a traditional employee buy-out where a majority of shares are transferred to employee ownership, the shares in an EOT are held in trust and managed by a Board of Trustees.
EOTs: the benefits to the business owner/seller
The Employee Ownership Trust option is attractive to business owners seeking control over the timing of their exit and the shape any ongoing role might take. An EOT can allow the outgoing business owner to remain as a Director and/or Trustee. Thus, offering the outgoing owner the opportunity to continue influencing the future direction of the business.
Secondly, an EOT is a good option for a business owner who wishes to safeguard the future of a loyal workforce. Passing the business into employee ownership reduces the chances of redundancy or relocation.
Thirdly, an Employee Ownership Trust is a tax-efficient way for a business owner to pass on their company. Legislation introduced in 2014 allows the majority sale of a business to an EOT to be exempt from Capital Gains Tax, subject to specific criteria being met.
EOTs: the benefits for employees
Stability and continuity are the primary benefits for employees of a company that goes down the EOT route. Unlike a trade sale that can lead to an increased risk of redundancy or relocation, an EOT often sees little change in how the business operates.
There are also financial benefits for employees when a business is majority-owned by an Employee Ownership Trust. As employees contribute to the increased profitability of the company they can be rewarded with bonuses. Furthermore, up to an annual limit of £3,600, these bonuses can be paid free of Income Tax.
How does an Employee Ownership Trust operate?
- The business is a trading company or a holding company of a trading group; and
- The EOT must allow all employees to participate, subject to a qualifying criterion (e.g. a period of continuous employment).
Much like any other business disposal a price is agreed upon for some or all of the shares. These are transferred into the trust on behalf of the employees. To achieve the tax benefits outlined earlier more than 50% of the company’s shares must be acquired by the trust.
Once the transaction is complete, the employee-owned business operates much the same as it did. The respective functions of the Board, management team and employees remain largely the same, as do their terms and conditions of employment.
Thinking about establishing or selling to an Employee Ownership Trust?
Consilium Chartered Accountants are highly experienced in delivering Employee Buy-outs for UK businesses. Our Corporate Finance experts support business owners in all aspects of exit planning, succession planning and employee ownership.
To arrange a confidential virtual or in-person meeting to discuss selling your business or establishing an Employee Ownership Trust, contact Linzi Wilson.