The power of Employee Ownership Trusts

eot-social.jpg.jpg

What is an employee ownership trust (EOT)?

Employee Ownership Trusts (EOTs) were introduced by the government in 2014 to provide a tax-efficient structure for the sale of a controlling interest in a trading company to its employees.

The flexibility and tax advantages of EOTs have helped them gain traction as an exit strategy in recent years, especially given the current economic outlook.

Using EOTs for succession planning can allow a business owner to pass on the company to its employees for full market value without incurring a CGT charge. This method of sale can provide an alternative to external sales, management buy-outs, or private equity-backed buy-outs.

An EOT option is certainly worth considering for a private company owner wishing to retire and looking for an alternative to a trade sale. It places the business in the hands of the people who understand it, have a strong personal commitment to its long-term success and are motivated by their ownership to make it prosper.

The advantages of using a qualifying EOT for succession planning are as follows:

  • an immediate purchaser for the trading company
  • no capital gains tax on the vendors
  • enables succession in family companies where nobody in the family wants to continue the business
  • encourages employees to take a more active and constructive interest in the business
  • flexibility for current shareholders to sell all or some of their shares (subject to limits required by the controlling interest and limited participation requirements)
  • current owners can remain as directors and receive market-rate remuneration
  • companies owned by EOTs can pay tax-free bonuses to their employees of up to £3,600, although NIC still remains payable

An EOT awards recognition for the contribution of a workforce yet maintains the culture and legacy already created. In turn, the business will find an increase in employee retention, and employment opportunities will be more attractive. Although the employee structure and day-to-day operations remain the same, the EOT gives employees the ability to contribute to business decisions.

Many family-owned or SME businesses do not have a succession plan in place so opting for an EOT removes any pressures should an illness or financial problem occur and in the future should the business choose to grow the process is proved to be more efficient with lower costs.

How can an EOT be structured?

  1. Tradeco makes a contribution to EOT, alternatively, EOT could borrow from a third-party lender.
  2. The vendor receives initial day 1 cash and/or deferred consideration for the share purchase.
  3. The vendor sells a minimum of 51% of the equity in Tradeco.
  4. Employees may receive a tax-free bonus of up to £3,600 per year.
  5. Key employees may be offered share options or equity as a wider/specific incentivization package.

EOT Conditions

  • the business must be a trading company or the holding company of a trading group
  • the trustees must retain a controlling interest in the business on an ongoing basis
  • the number of continuing shareholders who are directors or employees (and people connected with them) must not exceed 40% of the total number of employees of the company or group.
  • the settled property (the shares) must be applied for the benefit of all eligible employees on the same terms (but may distinguish the application of benefits based on length of service, working hours, and remuneration)

HMRC Consultation on EOTs

HMRC opened a consultation period from 18 July 2023 for 10 weeks providing the opportunity for input and comments on the proposed reforms;

  • proposal to ensure that the tax reliefs associated with EOTs meet the underlying objectives of the policy,
  • proposal to reform the Inheritance Tax for EOTs

The aim behind the proposals is to ensure that the focus remains on the targeted objectives of an EOT, in terms of rewarding employees and encouraging while preventing the misuse of tax advantages for unintended purposes.

The types of proposals consulted on include:

  • Prohibiting former company owners and connected persons from retaining control post-sale and requirements for the EOT trustee board to include employees or independent persons
  • To prevent establishing a qualifying EOT that is non-UK resident for tax purposes, whilst still allowing scope within the EOT rules to appoint non-UK resident trustees (alongside UK resident trustees)  if in particular cases this would be beneficial to the company.
  • Limiting the number of employees connected to ‘participators’ (those owning or entitled to more than 5% of the company's share capital) to 25%
  • To ease the EOT bonus rules, allowing tax-free bonuses to be awarded to employees without necessarily including directors.
  • Many EOT transactions involve deferred payment terms from the sold company to the EOT. The proposed amendment seeks to treat these payments as non-taxable dividends as long as the price the EOT agreed to pay for the company was not more than its market value. This change addresses concerns about relying on concessional tax reliefs from HMRC which can be withdrawn at any time.

Other considerations

  • Increasing the £3,600 limit on tax-free bonuses to take into account economic changes since 2014
  • Permit additional criteria for the allocation of bonuses, such as job role or level

The outcome of the consultation is still pending however with the newly appointed Labour government we expect further limitations but for EOTs to continue to be widely supported.

An incorrectly structured sale to an EOT can have adverse and unexpected tax consequences, therefore it is important to seek professional advice from an advisor with previous experience setting up EOTs before proceeding.

At Pierce we have experience implementing a sale to an Employee Ownership Trust, please do not hesitate to contact the Pierce Corporate Finance Team or Tax Director Dominic Ball on 01254 688100.

Enjoyed this? Read more from Pierce CA Ltd

Latest news

1

PM urged not to retaliate over tariffs Manufacturing

PM urged not to retaliate over tariffs

03 Apr 2025

2

CMAC Group appoints Matthew Ratcliffe as chief operating officer Matthew Ratcliffe CMAC

CMAC Group appoints Matthew Ratcliffe as chief operating officer

03 Apr 2025

3

For sale signs at The Villa Villa Wrea Green has been brought to market (Image credit: The Villa Wrea Green)

For sale signs at The Villa

02 Apr 2025

4

Montane group expands with new Lancashire hub Anthony Rae Scott Murcott And Adam Lee

Montane group expands with new Lancashire hub

02 Apr 2025

5

Trio of wins for Lancaster brand and digital consultancy Tom Grattan MD and Daniel Wallace

Trio of wins for Lancaster brand and digital consultancy

02 Apr 2025

Pc Prestonmacan Gif980x120 March
Background image for hub sign up block

LBV Hub

Leverage Lancashire Business View platforms

Post your news
Post your events
Post your offers
Build your network
Improve your SEO
Gain coverage in the magazine
Sign-up
Events
Lancashire Net Zero Carbon Conference
Net Zero Carbon Social 1200px
Networking
18 Jun 2025

Lancashire Net Zero Carbon Conference

Crow Wood Hotel & Spa Resort, Burnley, BB12 0RT

08:30 - 13:00

CMI Level 5 Management and Leadership Course
UCLanAerialCampus.jpg.jpg
LBV Hub Seminars
21 Feb 2025 - 21 Feb 2026

CMI Level 5 Management and Leadership Course

Preston Campus, Preston , PR1 2HE

09:00 - 17:00

CMI Level 5 Project Management Course
UCLanAerialCampus.jpg.jpg
LBV Hub Seminars
21 Feb 2025 - 21 Feb 2026

CMI Level 5 Project Management Course

Preston Campus, Preston, PR1 2HE

08:00 - 17:00

RISE - The Academy for Female Leaders and Managers
WENDY BOWERS RISE Illustrstion copy.jpg.jpg
LBV Hub Seminars
02 Apr 2025 - 08 Oct 2025

RISE - The Academy for Female Leaders and Managers

East Lancashire Chamber of Commerce, Clayton le Moors, BB5 5JR

09:00 - 15:30

Lancashire Business Expo 2025
https---cdn.evbuc.com-images-880395853-4862066883-1-original.20241022-091152-2.jpeg.jpg
LBV Hub Exhibitions
04 Apr 2025 - 04 Apr 2025

Lancashire Business Expo 2025

Sir Tom Finney Sports Centre, Preston, PR1 2HE

09:00 - 15:00

The Business Network Central & East Lancashire
LBV Hub Networking
24 Apr 2025 - 24 Apr 2025

The Business Network Central & East Lancashire

Stanley House, Blackburn, BB2 7NP

11:30 - 14:15

People Power: Exclusive Event Series
Stay ahead in 2025.jpg.jpg
LBV Hub Seminars
29 Apr 2025 - 29 Apr 2025

People Power: Exclusive Event Series

People's History Museum, Manchester, M3 3ER

17:00 - 21:00

Planning for the future + navigating Inheritance Tax changes
Planning for the future + navigating Inheritance Tax changes for website.png.png
LBV Hub Seminars
01 May 2025 - 01 May 2025

Planning for the future + navigating Inheritance Tax changes

Stanley House Hotel, Mellor, Blackburn, BB2 7NP, Blackburn, BB2 7NP

08:00 - 10:30

A night at the races
1.png.png
LBV Hub Dinners / Balls
02 May 2025 - 02 May 2025

A night at the races

Morecambe FC, Morecambe, LA4 4TB

19:00 - 23:59

Amber River True Bearing quarterly investment seminar
LBV Hub Seminars
22 May 2025 - 22 May 2025

Amber River True Bearing quarterly investment seminar

Cottons Hotel & Spa , Knutsford, WA16 0SU

16:00 - 18:00

Liverpool Business Expo 2025
https---cdn.evbuc.com-images-881365363-4862066883-1-original.20241023-085714.jpeg.jpg
LBV Hub Awards
23 May 2025 - 23 May 2025

Liverpool Business Expo 2025

Aintree Racecourse , Liverpool , L9 5AS

09:00 - 15:00

National Centre for Remote and Rural Medicine Conference 2025
Remote and Rural 3.jpg.jpg
LBV Hub Awards
05 Jun 2025 - 05 Jun 2025

National Centre for Remote and Rural Medicine Conference 2025

North Lakes Hotel and Spa, Penrith, CA11 8QT

09:30 - 17:00

Advertise with us

Reaching 50,000 members, our print, digital and event platforms offer a fantastic way to raise your business profile and help you grow.

Find out more Lbv121 Online Graphic
Subscribe now

Weekly news bulletin