In today’s dynamic business landscape, implementing the right succession strategy is vital for a company’s enduring success. Among the innovative options gaining traction in the UK is the Employee Ownership Trust (EOT).
Terry Moore, a Partner in the Corporate Team at Myerson Solicitors, delves into the wealth of benefits that Employee Ownership Trusts (EOTs) offer as a succession planning solution for business owners.
Understanding Employee Ownership Trusts (EOTs)
An Employee Ownership Trust enables business owners to sell their shares to a trust, which subsequently holds these shares on behalf of the company’s employees. This model allows employees to share in the company’s success without the financial burdens typically associated with buying shares.
Since their inception in 2014, EOTs have revolutionized business succession in the UK, bolstered by government tax incentives designed to promote this structure. EOTs present an appealing option for business owners looking to retire while ensuring the sustainable success of their company and its workforce.
Is an EOT the Right Fit for Your Business?
Benefits for Selling Shareholders
For business owners contemplating an exit strategy, transitioning to an EOT offers a flexible and tax-advantageous option compared to selling to a third-party buyer. A key advantage of this approach is that it allows selling shareholders to either fully retire or continue their involvement in the company, which is particularly beneficial for those who prefer to stay engaged during the transition process.
A significant perk for sellers is the tax relief provided under the Finance Act 2014. If specific requirements are met, the sale of shares to an EOT can be exempt from Capital Gains Tax (CGT).
To qualify for this tax relief, the following conditions must be satisfied:
- The EOT must acquire more than 50% of the company’s ordinary share capital. Although many EOTs choose full ownership, alternative HMRC-approved schemes, such as Enterprise Management Incentives (EMI) may also apply for companies predominantly owned by an EOT.
- The trust must benefit all employees equally, with some limited exceptions.
This framework allows the business to retain its independence and core values, which may otherwise be compromised with an external purchase.
Transitioning to an EOT can also be a more efficient and cost-effective exit strategy compared to standard business sales. There is no need to find a buyer willing to engage in comprehensive due diligence, negotiate terms, or risk withdrawal from the transaction.
Employee Opportunities in an EOT
One of the most significant advantages of an EOT is the opportunity it creates for employees to become indirect owners of the company. Although employees do not directly manage the company, the shares held in trust on their behalf allow them to enjoy financial benefits as the company thrives. This structure fosters a greater sense of ownership and responsibility towards collective goals.
For senior employees or potential future leaders, EOT ownership deepens engagement without exposing them to the financial risks of direct stakeholding. Eligible employees may also receive tax-exempt bonuses of up to £3,600 annually, though National Insurance Contributions (NICs) will still apply.
In larger organizations, establishing employee councils can facilitate employee involvement in decision-making, granting them a valuable voice, even if they lack direct decision-making power.
From a business continuity standpoint, transitioning to an EOT is often smoother than an external sale. Selling shareholders who remain in key roles contribute to stability and consistency for employees during the change.
Corporate Advantages of an EOT
Employee ownership correlates positively with enhanced productivity and overall company performance. Research from the Employee Ownership Association reveals that employee-owned businesses may enjoy productivity levels 8-12% higher than their traditional counterparts[i]. This surge in productivity can be attributed to a workforce that is more engaged and motivated due to their connection with the company’s successes.
Moreover, an EOT helps safeguard the company’s culture, values, and ethos. When a business is sold to an external entity, there is a tangible risk of losing or altering these critical elements. In contrast, an EOT preserves the existing leadership and management structure, ensuring the company retains its unique identity.
The EOT model can also enhance the company’s attractiveness as an employer. Employee ownership serves as a compelling tool for talent acquisition and retention, making the business stand out to prospective hires. The potential for shared ownership and associated financial benefits tends to draw high-quality candidates committed to the company’s future success.
Key Considerations Before Transitioning to an EOT
While the advantages of an EOT are considerable, careful evaluation is essential before adopting this structure for your business. Transitioning to an EOT is a complex process requiring legal and financial expertise to ensure compliance with all relevant regulations, especially concerning tax exemptions and share distribution among employees.
Business owners should consider their company’s size, workforce dynamics, and long-term objectives. An EOT may not be suitable for every business, particularly those with a culture that doesn’t align with shared ownership or where employees may lack interest in corporate governance.
Conclusion
Employee Ownership Trusts present a distinctive and advantageous succession planning approach for business owners. They provide valuable tax relief, ensure ongoing business continuity, encourage a motivated workforce, and preserve core company values.
Yet, sound judgment and professional consultation are imperative to assess whether an EOT aligns with your business goals. By working closely with legal and financial advisors, you can navigate the complexities of an EOT transition and confirm its suitability for your long-term objectives.
[i] EOA Manifesto – eoa manifesto.pdf
Terry Moore, Partner in the Corporate Team at Myerson Solicitors
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