Benefits of an Employee Ownership Trust

An employee ownership trust (“EOT”) is a trust that is set up to acquire shares in a trading company and holds them on behalf of the employees of the company. There are several benefits to both the employees and the sellers disposing of their shares to the trust, both from a tax perspective and a socio-economic perspective.

Whilst each company is different and the employee structure can vary significantly from company to company, there are some common benefits to be had when selling your company to an EOT.

Benefits of an Employee Ownership Trust to the Seller

The first and most obvious benefit to the seller disposing of their shares to an EOT is that the seller receives full Capital Gains Tax (“CGT”) relief. In most cases, this is a substantial saving when compared to a typical trade sale, in which the sellers would be liable to CGT of 10% on the first £1m of proceeds (providing they meet the conditions for Business Asset Disposal Relief, formerly Entrepreneurs Relief) and 20% on the remainder.  

Then comes the benefit of a sustained legacy. When selling a company to an EOT, the seller knows the employees to whom they are selling their business. There is a common understanding that the employees who work for the company are aware of and appreciate the legacy which has been built. As a result, the company culture is more likely to be preserved than in a trade sale to an independent acquiring party.  

The price of the business would need to be valued by an independent expert and as such the seller can rest assured that they are receiving a fair, market value for their shares.

Dissimilar to a typical trade sale, the sellers have a greater level of control around the timings and structure of the transaction.

For sellers who do not wish to terminate their employment immediately on sale, they can remain in the business under EOT ownership, as an employee and even continue as a director to drive the business forward. This can help ensure that the company remains profitable so as to pay its financial obligations to the seller (deferred consideration), whilst also steady under consistent leadership. This provides stability for the company and its employees as there is not a drastic change in leadership overnight.

Employee ownership trust benefits for employees

Under EOT ownership, the profits of the trading company are available for distribution to the owners, being the employees. It is important to note, however, that following a transition to employee ownership, profits will initially be required to pay the exiting shareholders for the value of the shares they sell. This is because a sale to an EOT is often (at least partly) funded through deferred consideration and as such, it can take time for profits to be available for distribution to the employees.

One of the most significant benefits for employees of a company owned by an Employee Ownership Trust is that they can receive tax-free annual bonuses of up to £3,600 (please note that national insurance contributions are still payable on these amounts). This acts as a large incentive to employees to ensure that the company is as productive and profitable as possible.

Employee-owned businesses can lead to greater levels of internal collaboration and a more stable leadership team and employee base in the long term.

Pete leads the Corporate Finance offering across the firm, having has spent much of his career within a large international accountancy firm and corporate banking before returning to Hawsons, where he started. Working with businesses of all sizes, Pete has an exceptional breadth of experience which he brings to the benefit of clients.

An early adopter and passionate believer in good employee ownership, Pete has helped numerous businesses transition to employee ownership and works extensively to promote the employee ownership model.