Employee ownership trusts: How can they benefit your business?

How can employee ownership trusts benefit your business? Our corporate & commercial specialists explore what makes them an attractive proposition.

Employee ownership trusts (EOTs) are becoming an increasingly popular solution for business succession planning, particularly where business owners are preparing to exit. They provide significant tax advantages, foster greater employee engagement, and help to preserve the culture and direction of the company.

What is an employee ownership trust?

An EOT is a type of employee benefit trust which allows business owners to transfer the controlling interest in the shareholding of their company to a trust which holds such shares for the benefit of the company’s employees.

Following the Autumn Budget in 2024, there are a number of requirements that must be satisfied in order to set up an EOT properly and to preserve the available tax benefits.

While exiting shareholders may continue to hold shares in the company, it is important to note that these shareholders, and any connected persons, cannot retain control over the company through the EOT in any way.

If any of the EOT requirements are breached within a period of four years from the end of tax year in which the sale to the EOT occurred, the tax relief will be withdrawn and capital gains tax (CGT) and potentially any inheritance tax (IHT) liability for the transfer will become payable.

What are the benefits of EOTs?

EOTs are an attractive option for shareholder exits in circumstances where there is no obvious third-party buyer.

EOTs offer tax relief to both employees and exiting shareholders. Where a shareholder sells shares to an EOT complicit with statutory requirements, the transaction will be free of any CGT liability. Moreover, in an EOT controlled company, a tax-free annual bonus allowance of up to £3,600 is available to all employees.

While tax relief is often seen as the primary advantage of an EOT, employee-owned companies also tend to experience higher levels of engagement, motivation, and productivity among staff. This enhanced performance, combined with the ability for former owners to remain involved in the company, positions EOTs as a compelling business structure for achieving long-term success.

Is an EOT right for my company?

While an EOT may be an attractive exit strategy for business owners, it is not a one-size-fits-all solution. Its suitability depends on a range of factors unique to each company, and careful consideration is essential before proceeding.

If you have any questions about employee ownership trusts, please don’t hesitate to get in touch with our expert corporate & commercial team.

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