Curious about Employee Ownership & Employee Share Schemes? Read our answers to the most frequently asked questions

Employee Ownership & Share Schemes FAQs

What is an employee ownership trust (EOT)?

An employee ownership trust (EOT) is a form of employee benefit trust with two tax reliefs.  Company owners selling more than 50% ownership to an EOT will be exempt from capital gains tax, and a company more than 50% owned by an EOT can pay its employees income tax-free bonuses

What is an Employee Benefit Trust?

An employee benefit trust is an arrangement under which assets (usually shares or cash) are held in a trust and so ringfenced for the benefit of a company’s employees.  Commonly a key part of the structure of an employee-owned company, normally as a more specific employee ownership trust

Why set up an employee benefit trust?

You might set up an employee benefit trust to buy shares from employee shareholders and recycle them back to other employees, or as part of an ownership succession plan (normally then an employee ownership trust), or to create a long term pool of shares held for the benefit of employees.

Does my client's company need an employee trust?

A trust can sometimes be useful as a warehouse for a company’s shares where it wishes to operate an internal share market or arrange for the purchase of shares from a departing employee. In a limited number of other cases, including where the chosen share scheme is a SIP or where an employee owned company is being created, an employee trust (or employee ownership trust or EOT) may be an important component in your share scheme. However, we think that in many cases an employee trust will not be needed.  Whilst trusts can play a very useful role in the operation of an employee share scheme, anti-avoidance legislation means that care is needed in the use of a trust (or any third party) to provide shares or other forms of benefit to any employees.

What is an employee owned company?

An employee-owned company is one that is wholly or substantially owned by all its employees. Ownership can be direct (all employees hold shares), indirect (shares are held by an employee ownership trust) or a mix of the two.

More details can be found here Employee ownership

Will a share scheme benefit our company?

There is a variety of independent research showing a strong positive connection between employee share ownership and improved company performance. Researchers have looked at different degrees of employee ownership and at particular types of employee share scheme.  We have put together a summary of findings of some of the research which provides more background

How do I work out what sort of share scheme is best for my company?

Please take a look at our Employee Share Schemes page

Do we need an all-employee share scheme or one for key people only?

The priority for many companies is to create a share scheme for their key people. Others take the view that expanding share ownership more widely will have a greater positive impact. Your own approach is likely to depend on your business, the profile of your employees and how many shares are available for use in your share scheme.

An all-employee scheme is likely to need more administration, although, if you wish, this can be outsourced

For more details look here Employee Share Schemes

Are there any tax incentives for employee share schemes?

Yes, in the UK there are tax incentives for both a company and its employees, although a share scheme will need to meet some precise requirements to secure income tax reliefs. Tax incentives might also be available in jurisdictions outside the UK

For more details look at Employee Share Schemes

Is an employee share scheme the same as an employee share plan?

Yes, the only difference is that in the UK we tend to use the phrase employee share scheme whereas in the USA and Canada the preferred term is employee share plan. Other terms with the same or similar meanings are included in our Glossary

Will my client's share scheme need to be professionally administered?

We will tell you if this is needed or advisable.

Does my client need shareholder approval?

We will tell you if this is needed or advisable. In some cases your client will need its shareholders to approve the launch of a new share scheme but it won’t always be necessary.

What is an EMI and how does it work?

An Enterprise Management Incentive (EMI) option scheme is a way of rewarding selected employees for performance and loyalty by giving them the right to acquire shares in their company from a future date at a fixed price. The more those shares subsequently grow in value, the greater the employee’s gain through buying at a price below value at time of purchase. Employee’s reward is taxed at a significantly lower rate compared with bonuses or other cash rewards.

What is a share incentive plan (SIP)?

Share Incentive Plan (SIP) is an employee share scheme under which employees may acquire shares in their company, with tax reliefs.  They enjoy relief against income tax and NI to purchase shares and/or receive free shares without being taxed on their value.   All employees must be allowed to participate.

How can an employee acquire shares?

The main ways for an employee to acquire shares in their company are

  1.  purchase
  2.  free shares; or
  3.  options to acquire shares in the future.

In the UK, a number of statutory tax incentives help reduce the financial cost to employees of acquiring shares.

Employee share schemes

The shares in our company aren't listed. How can employees turn them into cash?

If your company’s shareholders are working towards an exit (sale or flotation), that could be made the target for when employees can sell their shares. If your client has no specific exit plans, it may need to consider arrangements allowing employees to sell their shares through an internal share market.

How long does an employee trust or share scheme take to set up?

For an employee share scheme, this is likely to depend on whether it is to be extended to more than one country, whether HM Revenue and Customs are to be involved in the process and, if the company is listed, whether the share scheme will need shareholder approval.   If shareholder approval is not needed (or is needed but the company is private with only a small number of shareholders), it is to be operated only in the UK and HM Revenue and Customs are not involved in the process, the share scheme could be up and running in a matter of weeks. Otherwise, it may well take longer. A typical time for a private company is between two and three months.

For an employee ownership trust, the minimum time period is generally three months

How much does an employee trust or share scheme cost to set up?

We won’t charge for an initial discussion or meeting at our offices. Once we’ve then helped to identify a potential solution, we will confirm to you the cost of you engaging us to advise on more detailed design and implementation. We will provide a cost range with a top limit.

We have built our success on our ability to deliver excellent service at costs noticeably lower than those charged by many larger law firms, accountants and consultants. This is just one of the ways in which we believe our service meets the needs of the private and smaller listed company.

Why choose Postlethwaite Solicitors to help you?

If you choose us, you will be entrusting the design and setting up of your client’s company’s share scheme or employee ownership transaction to acknowledged specialists.  We have the experience to help you create a plan which aligns with your commercial and people objectives and to ensure compliance with all the relevant company law, employment law and taxation issues that may apply.  We pride ourselves on delivering a client-friendly and personal service and our ability to demystify the issues, which we believe our testimonials demonstrate.  But we think you’ll want to talk to us to decide for yourself, so do please contact us if you would like to arrange a meeting or to discuss the situation by telephone or email.

Glossary of terms

Unsure what a term means, this should help Glossary

Postlethwaite demonstrated time and again their detailed knowledge and expertise in this specialist field.  The move to employee partnership was one of the best things we have done for our business and our employees and has enabled us to grow and engage our employees.

Barry Hayes - Director Flo Group Limited
Robert Postlethwaite of Postlethwaite Employee Ownership & Share Schemes Solicitors

To explore how employee ownership or an employee share scheme could work for your company, call me on 020 3818 9420.