The rise of Employee Ownership Trusts
Chris Broome – Chartered Financial Planner
If you are a business owners you will no doubt have plenty on your mind. From the day-to-day tasks, to a long-term strategy, you’ll need to make many decisions.
When it comes to your long-term strategy, the most common of questions will always surround the end outcome for your business.
Is it sold? Merged? An internal management buy-out?
Or perhaps an Employee Ownership Trust (EOT)?
When the UK government introduced Employee Ownership Trusts back in 2014, their long-term objective was to encourage more businesses to move to an employee ownership model most famously employed by John Lewis.
If you’re not too familiar with what an EOT is, don’t despair.
What is an Employee Ownership Trust (EOT)?
An Employee Ownership Trust (EOT) is a legal structure that allows employees to own shares in the company they work for.
The trust holds the shares on behalf of the employees and manages them according to the terms of the trust deed.
The trust can be set up to give employees a say in how the company is run, but this is not always the case.
Typically, the trust is set up and controlled by the company’s management and the employees do not have direct control over the trust’s decision making.
The trust is usually funded by a combination of company contributions and employee contributions, and the shares held by the trust are typically not publicly traded.
The objective of EOT is to provide employees with a sense of ownership, which is believed to improve employee engagement, commitment, and productivity.
- Increased employee engagement and motivation: Employees who have a stake in the company are more likely to be invested in its success and take an active interest in its operations.
- Greater productivity: Employees who feel a sense of ownership and responsibility for the company may work harder and be more productive.
- Improved company performance: Companies that are employee-owned tend to perform better than those that are not, possibly due to the increased employee engagement and motivation mentioned above.
- Preservation of company culture and values: An EOT can help ensure that a company’s culture and values are preserved, even if the company changes hands or is sold.
- Tax benefits: In certain countries, an EOT can provide tax benefits for both the company and the employees, making it an attractive option for businesses looking to reduce their tax burden
In an employee ownership trust (EOT), the trust itself is typically not subject to income tax or capital gains tax on the profits or gains made on the shares it holds.
However, when the trust distributes profits or assets to the employees, they may be subject to income tax and national insurance contributions on the value of the distribution.
In the UK, EOTs have a special tax status, and there are certain tax reliefs available for companies that transfer shares to an EOT. For example, a company may be eligible for corporation tax relief on the market value of the shares transferred to the EOT.
Additionally, the employees may be eligible for capital gains tax relief on the value of the shares they receive from the trust, provided certain conditions are met.
EOT Qualification Conditions
- Size of the company: EOTs are typically only available for small to medium-sized companies, with a maximum number of employees or annual revenue.
- Employee participation: A certain percentage of the company’s employees must be eligible to participate in the EOT, and a minimum number of employees must actually participate.
- Ownership transfer: A significant portion of the company’s ownership must be transferred to the EOT, typically at least 50%.
- Control: The EOT must have control over the company and have the right to appoint a certain percentage of the board of directors.
- Purpose: The company must be operated for the benefit of its employees and the community, rather than just for the benefit of its owners or shareholders.
- Governance: The EOT must have a clear governance structure, including a board of trustees who are responsible for managing the trust and making decisions on behalf of the employees.
- Legal compliance: The EOT must comply with all relevant legal and regulatory requirements, including those related to tax, labor laws, and securities regulations.
Please get in contact with us today if you’d like more information on EOTs, we’d be delighted to talk you.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.