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An employee ownership trust (commonly called an EOT) is an ownership structure for private companies introduced by legislation in 2014 which offers generous tax benefits where companies are owned by their employees.
As well as enabling the incentivisation and engagement of employees and providing the benefits of employee ownership not just for the employees but also for the business and the wider economy, EOTs also offer significant tax advantages both to employees and to existing shareholders.
How does an EOT structure work?
Under an EOT scheme, the existing shareholders of a company sell a controlling stake in the business (at least 51%) to a newly established trust (the employee ownership trust) which then holds the shares for the benefit of the company’s employees.
The employee ownership trust is often established with a sole corporate trustee which may be a subsidiary of the trading company with a mixture of independent and internal trustee directors, or it may be established with an independent professional trustee.
What are the tax advantages?
Whilst BBS Law are not tax advisers and would recommend that anyone interested in the detail of the tax advantages of an EOT seek specialist advice in this respect, we would note the following as a high-level summary:
- A sale of shares to an EOT is free from Capital Gains Tax so any consideration paid to the selling shareholders is receivable by them in full.
- Contributions from the trading company to the EOT once it holds the shares can be made on a tax-free basis.
- Employees of the company are entitled to receive annual bonus payments (up to a capped amount) from the EOT which will be free from Income Tax.
Who might benefit from using an EOT structure?
As well as businesses looking to incentivise their employees and keen to move to a shared-ownership structure, EOTs may also be attractive to controlling shareholders looking for an exit which does not involve a sale to a third party, and which also allows them to reward the existing employees of the company.
There are a number of criteria which need to be met for a company to utilise an EOT scheme and we would recommend that anyone interested in finding out more about this type of structure seek specialist advice in this respect.
How can BBS Law help?
Here at BBS Law, we have assisted a number of clients in the sale of their businesses to EOTs and have considerable experience in the legal issues which commonly arise on the implementation of an EOT structure, and the preparation of the legal documentation required in this respect.
We work in a collaborative manner with the tax advisers on the transaction to ensure that the scheme is implemented in accordance with the tax legislation and also offer practical commercial advice to clients in terms of the operation of the business once this is owned by the EOT.
We advise from the start to the finish of the transaction and offer a commercial and client-led service on a fixed fee basis.
Note: This guide is for general information purposes only. If you require any further information or have a specific query you can contact our Corporate team. Our Partner, Dov Black ([email protected]) will be happy to assist.
