Employee ownership trusts
Employee ownership has become an increasingly popular exit route for business owners ever since the government introduced legislation in 2014 to help promote the transition to an employee ownership model for companies throughout the UK.
Whilst the attention-grabbing tax reliefs of Employee Ownership Trusts (“EOT”) are attractive, there are a host of reasons why an employee ownership model should be considered by anyone thinking of selling their business.
Hawsons Corporate Finance is a dedicated team of experienced Corporate Finance specialists who provide lead advisory, valuation, finance raising, and tax services to clients establishing employee ownership structures using Employee Ownership Trusts.
What is an Employee Ownership Trust?
An EOT is a form of indirect employee ownership and is usually achieved by the sale of a controlling interest in a trading company to an EOT. The EOT then holds the controlling interest in the company for the long-term benefit of the employees as a whole.
The EOT becomes the owner of the company and is administered by trustees on behalf of the employees, the trustees could consist of the exiting owners of the company, an independent chairperson, and employee representatives.
Whilst an EOT can hold a minority interest, in this scenario, it would not qualify for some of the tax reliefs available. An EOT is often considered because it is a tax-efficient exit strategy for shareholders wanting to sell. Furthermore, the business could benefit in the long run as it enables employees to be rewarded tax efficiently.
How to fund an Employee Ownership Trust
Once an EOT is established as the preferred exit route, a market price must be agreed which is determined through an independent valuation of the company.
Financing an EOT transaction typically starts with any surplus cash the business already holds. This can be supplemented by raising external borrowings and in most situations, there will be a debt owed by the EOT to the selling shareholders. This debt will then be paid off over a period of time out of the future profitability and cash generation of the business.
Over time, the EOT company may be in a position to start distributing its profits which the EOT can then payout to the employees (similar to a dividend).
Benefits of selling to an EOT
- Sale of the business at market value
- Tax-free disposal of shares
- Current owners can still hold up to 49% of the business
- Incentivises management and key employees
- Can work well for those looking to sell quickly
- Closer alignment of the interests of employees and stakeholders
- Improves business performance as employees have more of an incentive to succeed
- Improves employee retention (easier to retain the best talent in an EOT)
- Improves employee engagement and innovation
- Tax-free bonuses for employees (up to £3,600 per year for each employee)
Frequently asked questions/ knowledge bank
Is an Employee Ownership Trust right for you and your business?
This is a difficult question because so many different factors come into play but it is fair to say it is not right for every business or situation.
However, committing to an EOT will mean a change in business model. In most cases it is a positive change as this will change the mindset of your employees as they become more incentivised and committed to the business often creating a more sustainable business model.
What are the tax benefits?
There are three main benefits of selling to an EOT.
- When you sell your majority share the sale should be exempt from Capital Gains Tax and Income Tax, subject to the qualifying conditions being satisfied.
- The contribution of funds by the company to the EOT will not be deemed a chargeable transfer for inheritance tax
- Finally, an EOT company is entitled to pay employees up to £3,600 in tax free cash bonuses each year (although National Insurance is still due).
Who can benefit from the EOT?
It is important that for the benefits of an EOT transaction to be realised that the EOT itself must be for the benefit of all employees. However, anyone that sells shares to the EOT that remains employed by the company cannot benefit from the EOT. There are specific conditions which must be satisfied around how employees may benefit.
How can we help?
Hawsons Corporate Finance are experienced and qualified to advise on whether an EOT transaction makes sense for you and your business. We can advise on and project manage the whole process including:
- Valuations of the business
- Tax advice
- Sourcing funders
- Strategic review
- Employee Ownership Trust design and tax structuring
- Overseeing completion of the sale
- Communicating with employees