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Employee ownership trusts

Employee Ownership Trusts

What is an Employee Ownership Trust (EOT)?

An EOT is a form of employee ownership of a company where shares are held via an Employee Benefit Trust (EBT). EBTs are trusts established to hold assets and provide benefits for the employees of a company or group of companies. An EBT has to meet certain criteria to be an EOT, including a requirement to have a controlling interest in the company whose shares it holds. 

Advantages of EOTs

EOTs can be used as a tax efficient succession planning tool (see below).

  • There is no complication of creating a minority interest or voting conflicts as shares are held in trust.
  • Being an employee owned business can be used as a recruitment and procurement tool.

Research from the Employee Ownership Association (EOA) suggests that:

  • employees of employee owned businesses are more likely to be engaged and fulfilled
  • employee owned businesses are more resilient
  • 80% of employee owners experience a sense of achievement from their jobs which has a direct effect on productivity and innovation.

The tax benefits of EOTs

Provided the legislative requirements are met:

  • no Capital Gains Tax charges will arise on the transfer of shares from qualifying shareholders to an EOT
  • tax free bonuses of up to £3,600 per employee per annum can be paid by the EOT company to qualifying employees.

Relevant statutory conditions

In summary, for an EBT to qualify as an EOT it must:

  • hold more than 50% of the ordinary share capital and voting rights of the company and be entitled to more than 50% of profits distributed and assets on a winding up
  • subject to limited exceptions, benefit all eligible employees of a company or group on the same terms.

What kind of incentive is an EOT?

An EOT is a form of employee ownership but doesn’t involve any employees being given or granted options or shares. Instead the controlling interest of the company is held on trust for the employees collectively as beneficiaries. John Lewis and Tiptree Wilkin & Sons are examples of well-known and successful businesses which are employee-owned.

Shareholders who are interested in using an EOT as a vehicle for succession should consider how the acquisition cost of the EOTs purchase of the shares will be funded (if the shares are to be sold).

Birketts demonstrated meaningful employee ownership experience, technical advisory skills and a practical approach when working alongside our accountant advisors BDO which we found to be extremely valuable.

Paul Hickey, McGee Group Finance Director

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