Employee Ownership Trusts

19 July 2023

Employee Ownership Trusts have become increasingly popular for businesses looking at succession planning. As part of our client support programme, we recently ran a seminar with legal tax specialists Andrew Evans and Debra Martin from Geldards Solicitors.

 

Employee Ownership Trusts

If you’re a business owner looking at selling your company, it might be worth looking at Employee Ownership Trusts (EOTs). For anyone who wants to protect both the legacy of their business and local jobs, especially where there’s not an appetite for an MBO, it’s an alternative way to sell your business.

You will recognise some of the big brands that have already embraced EOTs. They include household names like Richer Sounds, Riverford Organics, Aardman, GoApe and Lush Cosmetics.

Creating an EOT is a great way to be tax efficient in the sale or transfer of your business. It’s also a preferred option for many companies since the 2020 changes to Entrepreneurs’ Relief which offered up to a 10% tax rate on a business sale of up to £10 million, it’s now called Business Asset Disposal Relief and doesn’t give anywhere near the same tax relief as before.

So, what is an EOT and is my business eligible?

To start with the business needs to be a limited company, not a partnership or LLP. It must be a trading company and the EOT must buy a minimum of 51% of your business, which will mean losing control of your company. The final part of eligibility is that all employees are treated equally. This could mean a part-time employee has the same rights as a full-time, but often it’s based on hours / days worked.

Why should I sell using an EOT?

Directors often want to protect their legacy, and the jobs of employees who have been loyal over the life of the business. A number of trade sales will be bought by a bigger company, and some functions – like admin and accounts – become redundant. The new owner may change the location of a business, and most people in the team will lose their jobs. EOTs mean that the business will continue as it is, which is why it’s attractive to both the outgoing shareholders and the employees.

Many MDs don’t just leave, they stay on to transition the business so that the day-to-day functioning business changes over a period of time, rather than it being an abrupt exit.

And of course, there are big tax advantages as an outgoing shareholder.

The tax advantages of an EOT

There’s no capital gains tax (CGT) for the seller on the sold shares, which means the money is effectively tax free. Although there is a risk of clawback for CGT.

There is also a loss of business property relief for inheritance tax purposes at the point of sale.

And there’s a really great tax benefit for the employees of the EOT, as they are each eligible for a tax free sum of up to £3,600.

How EOTs work in practice

There are three parties in an EOT: the outgoing party, the employees and the trustees. The trustees play an integral part in the success of the business. Trustees can include the outgoing directors, especially where they still have day-to-day involvement in the business. They also need employee representation, and it could be worth including someone neutral like an accountant, to ensure the financial success of the business. It’s also good to have a neutral person to create equal platform within the trust. The new management team will be reporting to the trust, so not all managers have to be trustees.

EOTs are something to celebrate

There’s even an EOT day every year on 23 June, where companies celebrate their status. For many of the employees this is an opportunity to play a much bigger part in their working life, and its level of empowerment can be extraordinary. The EOT day is run by the Employee Ownership Association, and the organisation’s website is a useful resource for all parties looking at EOT.

Next steps

If you are looking at succession planning, or thinking of selling your business, and would like more information on creating an Employee Ownership Trust, please contact us by email success@maple.uk.com

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