Although employee ownership is far from a new concept (the John Lewis Model is a well-known example), Employee Ownership Trusts (EOTs) are growing in popularity so it seems like a topic worth covering now.
An EOT is a tax-favourable way of selling your trading company to a trust that essentially looks after the employees as a group. If you meet the criteria the sale is tax-free which, as I mentioned in my blog last week, could be of increasing benefit given the potential for an increase in Capital Gains Tax (CGT) rates. Certain tax-free bonuses can also be paid to the employees each year but the overriding point is that the company can continue to operate and thrive under the beneficial ownership of the employees, or at least a body that is there to represent their best interests.
Commercial considerations first
It is important to consider the commercial position first and we would normally start by evaluating all the different options available to a business owner such as a third-party sale, private equity investment and management buyout. Perhaps none of the aforementioned meet your criteria but a share incentive plan like an Enterprise Management Incentive share plan may be another option to tie in key people.
In my experience, it is both sensible and worthwhile to explore the different possibilities before focusing on an EOT.
The EOT model doesn’t suit every business and the tax reliefs only apply to trading companies, so what could be behind the increase in popularity?
The obvious advantage of an EOT is the potential for enhanced employee engagement, commitment, and performance. Whilst employees don’t directly own the company, its ownership is held for their benefit which means employees are more invested than when the company is owned by a few individuals.
Management development and succession
If employees are invited to be trustees, this can be useful in developing the next layer of management. It’s also reasonable to expect that succession will be less of an issue within an EOT.
Although not impossible, it is pretty unlikely that a company owned by an EOT would be sold because the trustees would have to be satisfied that any sale was in the best interests of the employees and that would be a difficult decision for any trustee to make.
Shareholders can sell their shares for full market value, subject to independent valuation and there should be no capital gains, income, or inheritance tax liabilities on the disposal. Not only that, but not all shareholders are required to sell their shares to the EOT, and the directors can remain in situ post-disposal, continuing to receive competitive remuneration packages.
If you’d like to consider an EOT for your business, get in touch with tax partner, Kate Naylor by calling 0113 297 6825 or email firstname.lastname@example.org.