Guest Blog – Business Owner Focus

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. We’ve asked our good friend Tracy Evans of EMW Law to shed some light on this subject, just for your benefit.

Employee Ownership Trust

The rise of Employee Ownership Trusts

Tracy Evans – Legal Director – EMW Law

What is an Employee Ownership Trust (EOT)?

An Employee Ownership Trust (EOT) is an indirect ownership model.

The concept was introduced by the Finance Act in 2014 after a government review identified that employee owned companies were often more resilient and sustainable.

Despite being introduced in 2014, in our experience, it is only in the last few years that a sale to an employee trust is being considered more widely by owners looking at succession as an alternative to a traditional trade sale or management buy-out route.

When an EOT purchases shares, they are held on trust for the benefit of the company’s employees; the employees never obtain direct ownership of the shares.

A trust deed establishes and provides instructions on the operation of the trust, and typically there will be a corporate trustee.

The corporate trustee operates in accordance with the trust deed and ensures the trading company is being well led and led in a manner that maximises employee engagement.

Benefits of an EOT

One key benefit to a seller is that a disposal of shares to an EOT is exempt from Capital Gains Tax (CGT) if all qualifying conditions are met.

In addition to the generous tax benefit a seller may receive they also largely control the timing of an EOT transaction, they do not need to find a third party buyer, they can remain employed in the business post-sale, and the professional costs are generally lower than a usual trade sale.

From an employee perspective, an EOT transaction removes uncertainty over job security, the employees can participate in discretionary tax-free bonuses on an annual basis and if they are an employee when the company is sold they may receive some of the proceeds of the sale.

Key qualifying conditions

Employee Ownership Trusts

Next steps

We have assisted numerous companies with an EOT transaction across varying sectors.

Commonly, the companies have large cash reserves that form part of the consideration paid at completion, have between 2-5 selling shareholders, and have a strong management team in place.

The EMW team have a wealth of experience in this area and would welcome any questions you may have in relation to an EOT transaction, on a no obligation basis.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.