What happens when an EOT comes to an end?

An Employee Ownership Trust (EOT) is designed to preserve long-term employee ownership of a company. However, there may come a time when the EOT reaches the end of its life. In our experience, this happens rarely but is something that should be considered and thought about.

Why might this happen? What decisions would need to be made?  What happens if the trigger is a sale of the company?  And what about taxation (yes, there’s no avoiding it)? In this blog we look to address some of these questions…

Why Might an EOT Come to an End?

An EOT might need to be unravelled for a number of different reasons::

• Company Sale: Trustees decide it’s in the beneficiaries’ best interests to sell their shares in the company, for example if the company can no longer thrive as an independent business.
• Assets Sale or Ceasing to Trade: This could happen due to insolvency.
• Other Disqualifying Events: Legal conditions of the EOT are no longer met, triggering tax consequences which may require the EOT to sell the Company to raise funds to pay the resulting tax charge such as:
• Failure to meet the all-employee benefit
• Trustees acting outside the terms of the trust deed
• The ratio between individual 5%+ shareholders who are employees and employees as a whole becomes more than 2/5
• 50% or more of trustees become people who are former owners
• The EOT becomes non-UK resident

Key Decisions Trustees Must Make

 If the trustees are considering a sale of the company, here are some key things they’ll need to think about:

1. Assess the Company’s Future

If the environment in which the company operates changes adversely and significantly, the EOT trustees may need to  evaluate whether continuing under employee ownership remains viable. For example:

• • Is independent ownership sustainable?
  • Are growth opportunities better under a new owners

2. Is a Sale in Beneficiaries’ Best Interests?

This is the key judgement for the EOT’s trustees to make.  They must balance benefits of a sale against potential downsides:

• Potential advantages: Possibility of significant purchase price leading to a financial distribution to employees and/or stronger growth (or survival) as part of a larger group with protected or enhanced job prospects and security.
• Potential disadvantages: Loss of cultural and other benefits of employee ownership, adverse job impacts, loss of profit-sharing arrangements.

3. Practical and Legal Considerations

• • Do trustees have all necessary information and advice?
  • Are there any conflicts of interest?
  • Does the trust deed or shareholder agreement allow for the sale, or require any particular consents or other steps to be taken?

What Happens in the Event of a Sale?

If the trustees do decide to sell the company, there are several key steps to follow:

Review Tax Implications:

• Capital Gains Tax (CGT): Trustees may become liable for CGT on the difference between the original owners’ base cost and the company’s value immediately before the sale or other disqualifying event (whether this is the case this will depend on how long after the EOT’s original purchase the sale takes place).
• Income tax and National Insurance Contributions (NI) apply to distributions from the EOT of its net assets after payment of CGT and expenses, which must be carefully managed
• Distributing Proceeds: Net proceeds must be distributed on the same terms to all beneficiaries (unless the trust deed provides for payment to charity instead), as per the trust deed. This includes former employees in the previous two years.  Certain exclusions from benefit apply, such as employees with less than a qualifying period of service or who are (or have been) 5%+ shareholders

Practical steps after the sale of an EOT

The EOT will need to be formally ended, tasks are likely to include:

• Finalising trust accounts and tax returns.
• Removing trustees from Companies House and the EOT from the Trusts Registration Service

Another viable option compared to a sale of the EOT could be an Asset Sale.

The company may sell its assets instead.   This is most likely on insolvency but could occur in other circumstances.   In that case, the company would use sale proceeds to pay its debts, with any funds left over, paid to the EOT and then likely distributed to employees.

Conclusion: Planning for an EOT’s Future

While the primary aim of an EOT is to preserve employee ownership, circumstances may change. Trustees must act in beneficiaries’ best financial interests, ensuring careful consideration of all options, tax implications, and legal obligations.

If you’re navigating the complexities of an EOT’s end, seeking professional advice is recommended to ensure safe navigation through the legal requirements and tax rules.

For further advice or if you have any questions related to this, please contact us on the details below…