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What is an Employee Ownership Trust (EOT)?

An EOT is a type of employee benefit trust in which a business is held on trust for the benefit of its employees. Employees do not have a management role or directly own shares in the business. Instead, shares are held by trustees for the benefit of the business’ employees, and the employees have a say in how the business is run. The largest and most famous example of an employee-owned business is the John Lewis Partnership.

How does it work?

In order to set up an EOT, certain qualifying criteria need to be met:

1. The company must be a trading company

2. The trustees must hold a controlling interest in the company (i.e., at least 51% of the company’s shares). A controlling interest must be held by the trustees at all times.

3. Following a sale to an EOT, the number of continuing shareholders who are directors and employees must not exceed 40% of the company’s total employees.

4. The trustees must hold shares on behalf of the employees on equal terms. However, an exception to this is that trustees may distinguish between employees based on pay, length of service, and hours worked.

Provided the criteria are met, a valuation of the company’s shares is carried out to establish a share price. Shares are then sold to the trust under a share purchase agreement and the EOT is created by way of an employee ownership trust deed.

What are the benefits?

There are many benefits of EOTs including:

1. An EOT creates an immediate buyer for the business

2. Employees can acquire a stake in the company without using their own funds

3. As employees have a financial stake in the business, this can result in higher productivity and reduced absenteeism

4. Employees are entitled to a tax-free annual bonus of up to £3,600.00 as part of any profit share

5. Business owners can choose to sell all of their shares or only a proportion of them

6. Business owners do not need to worry about succession if there is no one suitable to take over the business

7. Provided that certain criteria are met, no capital gains tax will be payable on the sale of shares to the trustees

8. A sale to an EOT tends to be quicker than a traditional business sale

9. Following a sale to an EOT, the existing management team can remain in place

If you need any help or advice on selling your company or Employee Ownership Trusts, call us on 01484 821 500 or fill out our online enquiry form to request a call back.

The content is accurate at the time of writing and is subject to change.