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Employee Ownership Trusts

Employee Ownership Trusts or EOTs allow a company to be part-owned by its employees, giving them a higher level of interest in its success. The scheme was established by the Finance Act 2014 and tax benefits are offered to encourage business owners to adopt this model.

The EOT scheme differs from share ownership in that the interest in the company is put into a trust for the benefit of the employees, rather than giving them shares. The EOT option is easier to set up than other methods of share sale as well as providing the owner with a fair price for the shares.

At Glanvilles, our corporate solicitors can advise you on the potential advantages to your enterprise of becoming an employee-owned business. We will establish whether this is the best course of action and ensure that you understand the implications of making the change.

Our team has extensive experience in working with businesses to structure them in the most advantageous way and we will discuss issues such as tax benefits, long-term strategy and share sale and valuation with you.

We work with companies and EOT trustees to ensure ongoing compliance and clear employee communication. Our service is comprehensive, and we will provide the guidance and support you need to set up and run the scheme, including ongoing advice on issues such as employee ownership trust tax and regulatory compliance.

For those who already have an EOT scheme in place, we provide advice and reviews of the structure where necessary, as well as help with employee ownership trust problems that may have arisen.

Get in touch with our employee ownership trust solicitors

Contact our expert employee ownership trust solicitors in ChichesterFareham or Havant or fill in our simple online enquiry form for a prompt response.

Employee ownership trusts FAQs

What is an employee ownership trust?

An EOT is a trust set up to hold more than half of the shares in a company for the benefit of its employees.

The employees will have a significant and meaningful stake in the business, which means both ownership of shares and input into how the organisation is run.

Employee engagement will happen in the way best suited to the business. Options include:

  • Having employee directors on the board of directors, with the same powers as other directors
  • Creating an employee group for consultations
  • Putting a constitution in place that sets out how the company will work with its employees
  • Taking input from trade unions

An EOT can also be set up by a limited liability partnership, although the LLP will need to transfer its business into a company to do this.

How does an employee ownership trust work?

An EOT will hold a controlling interest in the company, with over half of the shareholding and voting rights and the right to over half of the distributed profits. When employees join the scheme, they will become one of the joint owners of the majority shareholding.

Employees have some input into the running of the business as well as a share of the profits. There is also the option for the company to pay tax-free cash bonuses of up to £3,600 each per year to employees.

How is an employee ownership trust funded?

The EOT will initially need to purchase the majority shareholding from the company’s owner for a fair price. The company will need to be independently valued to arrive at the price and the owner does not need to discount the shares.

The trust will usually fund the purchase from a combination of the company’s cash reserves and loan notes repaid on an ongoing basis from the company’s profits. The loan notes can be flexible to allow for variable levels of profit.

It is also possible to fund part of the purchase price with an external loan.

How to set up an employee ownership trust

The first step is to work with experienced corporate lawyers to establish that an EOT is the right option for your business and to put the right legal structure in place to allow for the share transfer.

You will need to make a range of decisions, including:

  • What proportion of the shares will be sold to the trust
  • How the purchase of the shares by the trust will be funded
  • Who will become the EOT trustees
  • How the trustees and the company directors will interact
  • How the company will be valued
  • How employees will be enabled to have input into the running of the business
  • How employees will be entitled to benefit from the trust, for example, will the benefits they receive depend on criteria such as remuneration, length of service and hours worked
  • Whether an employee council or similar body will be established to deal with communication with employees

It will also be necessary to secure HMRC clearance to the EOT structure

What are the advantages of an EOT?

Establishing an EOT can motivate employees and help with both recruitment and retention. Absence may be lower and employees are likely to feel more engaged and supportive of the success of the business.

Research has shown that where employees have a stake in a company, the business tends to be more profitable, successful and sustainable than those where they do not.

An annual £3,600 bonus can be paid to employees without any deductions for income tax.

For employers, they can secure a fair price for a majority share of their business but still retain part of it if they want and also continue to deal with the running of it. There is the option to lessen their involvement over the years as the full payment for their shares is made. It is unlikely that the company’s ethos or way of operating will change drastically with this type of sale.

Selling to an EOT is usually deemed a ‘friendly’ sale and is often easier and faster than an external sale. Less due diligence work and substantially less negotiation are generally required. A sale to an EOT also has a higher chance of success.

If there are limited external buyers, a sale to an EOT is a way of securing a fair market value for your business.

There are tax advantages to this type of sale, as no income tax, capital gains tax or inheritance tax is generally payable when shares are sold to the trust.

What are the downsides of an EOT?

As a business owner, you are unlikely to receive full payment for the share of the business sold to the EOT for many years, as your payments are likely to come from profits made over a number of years.

This can also be an initial disadvantage for employees, as they will not receive substantial benefits from the EOT until the shares have been paid for.

It is not generally easy to obtain external funding for this type of purchase.

For these reasons, EOTs may not be suitable for businesses that have a high value as it would take too long for the seller to receive payment in full for their share. They might also not be the right choice for businesses that need high cash flow.

If there are external buyers willing to pay a higher price for the business, this may be a better option for the owners than an EOT, where they may need to wait for full payment.

What is the role of an employee ownership trustee?

The EOT board of trustees should be comprised of employees and those with experience of corporate governance. Trustees will be in charge of making decisions that would formerly have been made by the shareholders.

They will be responsible for overseeing how profits are handled and the repayment of loan notes, as well as reviewing the company’s financial performance. They will also have the power to appoint and dismiss directors as well as a say in director pay.

Why choose Glanvilles’ employee ownership trusts solicitors?

Our corporate law team can advise you on the potential benefits of an EOT scheme for your business and go through the set-up with you, ensuring that the correct structure is put in place and that it is compliant with tax and other regulations.

We have a strong commercial focus and our advice to you will take into account the position your business is in and what you want to accomplish for the future.

We provide an outstanding service to our corporate clients and will work as part of your team to provide the bespoke advice you need for success.

For more information on our services, see our corporate solicitors page.

For information on other types of incentives for employees, see employee share schemes.

Get in touch with our expert employee ownership trust solicitors

Contact our experienced employee ownership trust solicitors in ChichesterFareham or Havant or fill in our simple online enquiry form for a swift response. We are always on hand to lend our expertise and assist you promptly.