23 August 2024

Employee Ownership Trusts (EOTs) offer a compelling alternative for business owners considering succession planning or selling their company. EOTs provide several advantages that benefit not only the sellers, but also the employees and the business itself. Here's a closer look at why EOTs are becoming an increasingly popular choice.

What is an Employee Ownership Trust?

An Employee Ownership Trust (EOT) is a model of business ownership in which a trust holds a controlling stake in a company on behalf of its employees and can pass the benefits of ownership to employees rather a small number of shareholders taking the vast majority of profits from a business. Established by the Finance Act 2014, EOTs were designed to promote employee ownership by providing tax incentives and creating a structure that facilitates the transfer of business ownership to employees.

Tax Benefits

EOTs come with substantial tax advantages. Selling shareholders can claim 100% relief on capital gains tax arising from a sale to an EOT. Moreover, after the transaction, the company can provide tax-free annual bonuses to employees, up to a sum of £3,600. This dual benefit of tax relief and the ability to offer bonuses can make EOTs an attractive option for both sellers and employees. There are rumours that capital gains tax rates may increase in the short or medium term which would further emphasis the tax benefits of EOTs.

Smooth and Certain Sale

Another advantage of EOTs is the simplicity and certainty they offer in the sales process. From the seller's perspective, the transaction is typically friendly and straightforward since it involves an internal buyer. This eliminates the need to find an external buyer, such as a trade buyer or private equity investor, thereby increasing the likelihood of completing the sale rapidly and relatively stress free.

Leadership Incentives

The EOT structure allows the management team to set up share incentive schemes, such as share options. These incentives can motivate management to perform at their best, aligning their interests with the long-term success of the company.

Enhanced Employee Engagement

Another standout feature of an EOT structure is the potential for enhanced employee engagement. When employees have a stake in the company, they are more likely to feel invested in its success. This heightened engagement often leads to improved retention rates, as employees are more motivated and loyal to an organisation they partially own.

Stability and Value Preservation

EOTs help preserve the company's values and culture, providing more certainty and stability for employees. Unlike third-party acquisitions, which can disrupt the existing organisational culture, EOTs ensure that the company's core principles and ethos remain intact. This continuity is reassuring for employees and can prevent instability which often created by an external takeovers.

Business Growth

A happy and stable workforce is more likely to be productive, contributing positively to the business's growth. When employees are engaged and feel secure in their roles, their productivity tends to increase, which can drive the company's expansion and success.

Conclusion

In conclusion, Employee Ownership Trusts offer a unique and advantageous path for business transitions. By creating a structure based on employee ownership, whilst taking advantage of significant tax benefits, and ensuring the preservation of company values, EOTs can create a win-win situation for sellers and employees.

Michael Cox, Partner: mxc@bto.co.uk / 0131 222 2939

Cameron Knaggs, Trainee Solicitor: ckn@bto.co.uk / 0131 222 2939