An EOT is a trust that enables a company to become owned by its employees and can be set up by a company’s existing owners, perhaps as part of their exit or succession planning strategy, or by founders starting a new business which they wish to be employee-owned. It was created by the Finance Act 2014, to encourage more companies to become employee owned.
Importantly for many business owners, an EOT creates two tax breaks:
- Those selling their shares may do so free of capital gains tax
- Once a company is owned by an EOT, it can pay annual bonuses to its employees free of income tax
There are two main conditions to enable the tax breaks:
- The trust must hold more than 50% of the shares in the company
- If employees receive any benefit from the trust, they must all be included and on the same terms
Employee ownership can offer the following benefits for:
For a private company owner wishing to retire but looking for an alternative to a trade sale, an EOT is certainly worth considering. It places the business in the hands of people who understand what makes it tick, have a strong personal commitment to its long term success and are highly motivated by their ownership to make it thrive.
Do employees hold shares personally?
Not necessarily. The EOT will hold shares on behalf of all employees and it will often not be necessary to include a feature in which individual employees each hold their own shares. However, it is possible to have an ownership arrangement under which the EOT holds a majority of the shares but also giving all employees their own personal shareholding.
For some EOT-owned companies, it is important to have a long term reward arrangement for directors or other key employees, and this can take the form of a share option or ownership scheme targetted at them (for example EMI options or CSOP options). Please note that as the shares here cannot come from the EOT (if it passes shares to employees, it must do so to all of them), they must be new shares issued by the company or perhaps be shares that the original owners have not sold to the EOT
Might an EOT be right for your company?
Employee ownership has the potential, by sharing the rewards of your company’s success with its employees, to create a powerful incentive to engage in the business and work together to improve its performance for everyone’s benefit. You can find more evidence on our Employee Ownership page.
You should consider an EOT if:
- You are looking how to retire from the ownership of your company in a way which creates a strong platform for future success in the interests of you, your business and its people, or
- You don’t feel a trade sale or management buyout is feasible or the best solution, or
- You want to start a new business with maximally committed and engaged people and a strong shared purpose, or
- You work in a business which needs to find a succession solution but has not been able to do so.
In the present difficult economic climate are you asking, “What can we do to maximise our chances of survival and bouncing back?”
We suggest that you read our short guide, in which we look at the role employee ownership can play: Employee Ownership and Business Recovery