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HCR Law Events

Employee Ownership Trusts

Employee ownership trusts (EOTs) were introduced by the government in 2014 and allow employees to have a greater say in the way the business they work for runs.

They are often set up by the company’s existing owners, perhaps as part of an exit or succession planning strategy, selling their shares to an employee ownership trust. These shares are then held for the benefit of employees.

Employees can indirectly buy the company from shareholders without having to use their own funds – this creates an instant buyer, saving time and helping both shareholders and employees reach their goals quickly.

Why would you consider an EOT?

In the current economic climate, many shareholders may be looking to exit without causing upset to their workforce. Selling through an EOT brings benefits to both business owners and their employees while providing a smooth platform for transition.

These trusts – famous examples of which include John Lewis Partnership and Richer Sounds – also lessen the burden for owners who wish to concentrate on the day-to-day running of the company rather than a time-consuming sale process.

How an employee ownership trust could benefit your business

The benefits of using EOTs are numerous and far-reaching.

In the short term:

  • They allow for exits where there is no obvious third party
  • They provide quick exit routes for shareholders
  • Owners can keep some involvement in the company (up to 49%).

In the long term:

  • Stakeholder and employee goals are aligned
  • Innovation is encouraged at all levels
  • Improved employee retention and morale
  • Improved engagement.

Tim Ward

Partner, Head of Corporate in Cheltenham

Direct Dial: +44 1242 211 646
Mobile: +44 7725 241 072

KEY CONTACTS

What is an employee-owned trust?
An employee-owned trust, or ‘EOT’, provides indirect ownership of a company via the employees. The EOT acquires a majority stake and holds it for the benefit of the company’s employees in the long-term.

What are the benefits of an EOT?
Advantages include:
• Greater employee engagement
• Tax advantages for both seller and employees – including no capital gains tax on the sale of shares and employees receiving tax free bonuses of up to £3,600 per person each year.
• An easier sale – an employee-owned trust will be a more stable buyer than a third party
• A ready-made exit – if the owner is unwilling to sell to a competitor or family, the business will be in the hands of the people who know it best – the employees

Will I receive a better return?
Potentially – as sale proceeds are free from capital gains tax, your overall return could be higher than through a more conventional sale. This may also be the case if you were to sell the shares to the trust at a lower price.

How are acquisitions of a controlling percentage funded?
These are mainly funded via the on-going profits of the acquired company. This means the company must continue to trade profitably after the sale. The consideration will be paid to the seller as profits are produced.

Is there a way I can retain a shareholding?
As long as the EOT acquires over half of the shares, as a seller you can retain a shareholding. This could be useful if you are not ready to leave the business altogether but who wish to hand over control to the employees.

Can I combine ownership with other incentives?
This type of ownership can be combined with share incentive packages, either through direct share ownership or tax-efficient share option schemes.

Do I need to meet any conditions?
Yes – these include:
• The EOT acquiring a controlling interest
• All eligible employees benefiting from the trust on the same terms
• The number of employees holding more than 5% of the shares not exceeding 40% of the total number of employees.

How can we help you?

EOTs also provide a number of tax benefits

For the owner:

  • Disposals made into the trust can be made free from capital gains tax and inheritance tax.

For employees:

  • The trust can pay annual bonuses of up to £3,600 income tax-free.

For the company:

  • Corporation tax can be deducted for the value of the bonuses.

EOTs we’ve worked with

Our corporate team have worked with a range of businesses transitioning to EOTs. They draft key documents, including:

  • Trust deeds, which establish governing powers of the EOT
  • Articles of association, which set out rules by which each company is governed
  • Share purchase agreements, to deal with the way in which shares are transferred and for what price.

Our EOT specialists within the Corporate team have worked across sectors as diverse as care, communications and law – with a collective value of £100m – to help a range of companies achieve their goals and become employee-owned.

Hear what our clients say about our Employee Ownership Trusts sector

Corporate Partner praised following creative agency’s move to employee-owned trust

Oliver Tomlinson, the founder of London-based TDL creative, turned to HCR’s Head of Corporate in Cheltenham, T...

Read full testimonial

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