Summary
Employee ownership trusts are a trust set up to acquire a controlling interest in a company, holding the shares on behalf of the employees. EOTs are becoming increasingly popular as an effective means of transferring ownership to employees, offering business owners a robust succession plan whilst simultaneously providing employees with a stake in the company's long-term growth and success.
What are the key benefits of Employee Ownership Trusts?
Tax Advantages of an EOT
A key reason for transferring ownership to an EOT is the tax benefits available. For disposals made on or after 26 November 2025, selling shareholders benefit from 50% capital gains tax (“CGT”) relief. This means that only half of the gain is subject to tax.
Separately, the EOT can pay bonuses to employees free of any income tax (subject to conditions). The limit is currently £3,600 per year, per employee.
There is also relief from inheritance tax on certain transfers into and from the EOT.
There are several conditions which must be satisfied at the time of the sale to the EOT. This also extends for a period of time after the sale in order for tax relief to apply. It is therefore important to assess eligibility at an early stage. You must also ensure that the conditions are met, and will continue to be met for the requisite period.
EOTs and succession planning
The primary motivation for business owners to consider Employee Ownership Trusts is the long-term continuity of their business. By transferring ownership to employees the company remains under the control of those most familiar with it. Employees familiar with the business, and its operations, will be committed and invested in its success. As such, an EOT serves as an effective and sustainable succession planning strategy.
Employee Engagement
An EOT encourages employee engagement. It also allows them to gain an interest in the company without using their own funds. Employees who have indirect ownership in the company are more likely to be invested in the success of the business. This often leads to higher levels of productivity, improved morale and greater job satisfaction.
What is the process of setting up an Employee Ownership Trust?
The process of setting up an EOT broadly involves the following key steps:
Initial Assessment
As mentioned above, there are certain conditions that must be met to make the transition to employee ownership. There are also conditions that need to be met to obtain the available tax reliefs. An initial assessment of eligibility needs to be conducted at an early stage. You will also need to consider who the trustees of the EOT will be. The team here at Blake-Turner would be happy to discuss your options and help with this.
From 30 October 2024, the trustees of an EOT must be UK resident. You may also be advised at this stage to apply for HMRC clearance.
EOTs and Valuations
Once you have decided to proceed with setting up the EOT, you need to determine the value of the company.
The trustees have an obligation to the beneficiaries not to overpay for the shares. It is therefore recommended practice that an independent valuation is obtained.
Creation of Employee Ownership Trusts
The legal documentation is prepared to create the EOT, including drafting the trust deed. The trust deed will govern how the trustees manage the trust on behalf of the employees.
Purchase of the Shares
The EOT will purchase at least 50% of the issued share capital of the company. The EOT will make the purchase and then sell to shareholders at market value.
The financing of the purchase price will need to be considered. This may be financed from company profits, third-party financing or a combination of both. It is common for an element of the purchase price to be deferred and paid out of future profits.
Where there is deferred consideration owing to the selling shareholders, the company uses future profits to contribute to the EOT. These are then used to repay any outstanding element of the purchase price and associated costs.
From 30 October 2024, HMRC take a view that contributions from a company to an EOT are treated as distribution.
However, there is specific claimable tax relief where contributions are made to fund qualifying acquisition costs. This may include payment of shares, repayment of acquisition borrowing and interest at a reasonable commercial rate.
Is an Employee Ownership Trust right for every business?
Employee Ownership Trusts are a great option for many businesses.
Employee Ownership Trusts require careful planning and management to ensure a smooth transition. That being said, they offer great benefits for both the selling shareholders, the company, and the employees.
If you are considering Employee Ownership Trusts, it is essential that you seek legal and independent financial advice. It is important that you understand the implications for you and your business.
The team here at Blake-Turner are waiting to help. Please get in touch with Paul Cooper or Hannah Starling to discuss employee ownership trusts. Our team are happy to help with any corporate legal assistance that you may require.