However, it’s only been in the last 12 months that EOTs have seen significant growth, partially due the generous tax breaks offered by them, but also due to them helping to strengthen employee engagement, retention and recruitment.
What is an EOT?
An EOT is a trust which is set up for the benefit of the employees of a business. Typically, the existing shareholders will sell a controlling interest (at least 51%) to the trust which results in the company becoming employee owned.
The business is then run for the benefit of all employees, with employees also then having a stake in the future success of the company. This doesn’t just apply to traditional companies, LLPs and those part of a bigger group can also take advantage of an EOT.
What are the benefits of an EOT?
As already touched upon, an EOT can have a positive impact on your team, but there are also tax and more practical benefits which have also helped their popularity.
Team benefits
- Staff recruitment and retention should be easier as well as reduced absenteeism.
- Employees interests are aligned with the interests of the shareholders resulting in a single desire for business prosperity.
- Current directors can remain in their roles if desired and receive market-rate remuneration packages.
Tax benefits
- There is no Capital Gains Tax for current company owners on the disposal of shares to an EOT. For a typical husband and wife owning shares in a trading business valued at £10m, this could generate a tax saving of £1.8m.
- There is no minimum requirement to own ‘X’ number of shares in the business before you can qualify, nor is there any minimum ownership period.
- All employees, once the company is controlled by the EOT, can receive tax free bonuses of up to £3,600 per year.
Practical benefits
- The sale to an EOT is seen as a ‘friendlier’ method of succession which means the process may be quicker than other traditional methods.
- Where businesses have tried to go through a third-party sale process and failed, an EOT could give them another option.
What conditions must be met in order to qualify?
The qualifying conditions for both the Capital Gains Tax exemption and also the exemption from income tax on bonuses are complex and detail orientated, however, in very simple terms the main conditions to consider are:
- The company being sold must be a trading company or the holding company of a trading group.
- All employees must be able to benefit from the EOT on equal terms.
- The EOT must continue to own a controlling interest in the company.
- The number of employees who are also shareholders, along with any of their relatives that work for the company, cannot exceed 40% of total employees.
There are also several conditions that must be met post acquisition; however, they are broadly similar to the above.
This seems too good to be true!?
We agree! EOTs are a valuable method of succession that should be considered by all businesses, however, naturally, they won’t be right for all.
Get in touch with our team if you would like to discuss your circumstances with one of our advisors and see whether an Employee Ownership Trust could be the right thing for you.
