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Is your business considering setting up an Employee Ownership Trust (EOT) as a means of restructuring your company? Ramsdens Solicitors can advise you on all aspects of corporate law surrounding EOTs, and help you establish an EOT structure that works for your organisation.
An EOT gives employees a financial interest in their future and increases their opportunities to engage with the business. It can also result in greater productivity and profitability, and can assist in the recruitment and retention of employees. There are also generous tax reliefs associated with an EOT for business owners. We can advise you on how this process works, and help you deliver maximum value for all stakeholders.
To find out more about our Employee Ownership Trust services, call the corporate law solicitors at Ramsdens on 01484 821 500, or fill out our online enquiry form to request a call back at a time that is convenient for you.
Our corporate team has advised a number of owner-managers on the sale of their shares to an EOT, ranging in value from the hundreds of thousands to the tens of millions of pounds. Ramsdens’ corporate team can help you identify the most tax-effective and appropriate means to achieve an exit from your business, utilising an EOT mechanism to attract, retain and motivate your employees.
By gaining a full understanding of what you want to achieve, and how that fits with your plans for the future of the business, we will look at all the available options and help you decide which one is right for you. As a full-service law firm, we can help with any ancillary legal matters.
Read our case studies to find out how we have helped other businesses establish an EOT:
An Employee Ownership Trust (EOT) is a specific type of business ownership model, designed to promote long-term employee engagement, foster a collaborative working environment, and ensure the sustainability of a company. EOTs were introduced under the UK Finance Act 2014 as a means of facilitating employee ownership of businesses. The primary aim of EOTs is to provide companies with an alternative exit strategy while offering employees a stake in the business they work for.
In an Employee Ownership Trust, a company's shares are held in trust on behalf of the employees, creating an indirect ownership structure. This arrangement ensures that employees have a collective and long-term interest in the company's success, fostering a sense of shared responsibility and commitment.
Key features of an EOT include:
An Employee Ownership Trust works by transferring a majority of shares to a trust on behalf of the employees, appointing trustees to manage the trust, promoting employee participation in decision-making, and distributing profits equitably. Here is a detailed breakdown of how an EOT works:
By transferring a majority of shares to an EOT, employees gain indirect ownership and have a say in the company's management. The benefits of an EOT for employees include financial rewards, increased engagement, participation in decision-making, job security, fairness and equality, skills development, enhanced corporate culture, and a sustainable succession plan. These benefits contribute to a more inclusive, stable and satisfying work environment for employees, fostering a long-term commitment to the company's success.
More details of the benefits for employees include:
Employees can benefit financially from the success of the company. As the EOT holds a majority of shares, any increase in the company's value will benefit the employees. Additionally, companies controlled by EOTs can pay tax-free cash bonuses of up to £3,600 per employee per annum, providing a direct financial incentive.
Employee-owned companies tend to have higher levels of employee satisfaction and engagement. With a stake in the business, employees are more likely to feel a sense of responsibility for its success, resulting in greater commitment and motivation.
Decision-making and influence
EOTs allow employees to participate in the company's decision-making process, either through employee councils, consultations or representation on the board of directors. This involvement gives employees a voice in shaping the company's strategic direction and policies, fostering a sense of ownership and belonging.
Job security and stability
Research suggests that employee-owned companies are often more resilient in economic downturns and experience lower staff turnover. Employee ownership can lead to a more stable work environment and a long-term commitment to the company's sustainability and success.
Fairness and equality
EOTs are required to treat all employees equally, regardless of their role or length of service. This principle fosters a more inclusive and fair work environment, promoting a culture of shared responsibility and collaboration.
Skills development and career growth
Employee-owned companies often invest in the professional development of their workforce, recognising that the success of the business relies on the skills and expertise of its employees. This can result in more opportunities for training, career progression and personal growth.
Enhanced corporate culture
EOTs tend to promote a more inclusive and collaborative corporate culture, where employees feel valued and supported. This positive work environment can contribute to improved job satisfaction, productivity and overall employee wellbeing.
Succession planning and continuity
EOTs provide a sustainable succession plan for the company, ensuring its long-term success and continuity. As employees have a vested interest in the company's future, they are more likely to work towards a smooth transition during times of change, or when the business owner exits.
Here's a detailed overview of the benefits of an EOT for business owners:
When a business owner sells at least 51% of the company's shares to an EOT, they become eligible for capital gains tax relief. This exemption can result in substantial tax savings, making EOTs an attractive option for business owners seeking to exit or reduce their shareholding.
EOTs offer a sustainable exit strategy for business owners looking to retire, sell their business, or transition to a new venture. By transferring ownership to the employees, business owners can ensure the company's continuity and long-term success under a stable and committed workforce.
Employee engagement and retention
Employee-owned companies often experience higher levels of employee satisfaction, motivation and retention. A committed workforce with a vested interest in the company's success can lead to improved productivity, innovation and overall business performance.
Research has shown that employee-owned companies tend to be more resilient during economic downturns. The shared sense of responsibility and long-term commitment fostered by EOTs can contribute to a stronger, more adaptable company that can better weather challenging market conditions.
Enhanced corporate reputation
Companies with EOTs are often seen as progressive and socially responsible, enhancing their reputation among customers, suppliers and potential employees. This positive image can help attract new business and talent, and create stronger relationships with stakeholders.
Access to finance Employee-owned companies may have better access to finance due to their stable ownership structure, lower staff turnover, and potential for increased productivity. Lenders and investors may perceive EOTs as lower risk and more sustainable, making them more willing to provide funding.
Reduced risk of hostile takeovers
With a majority of shares held by the EOT, the risk of a hostile takeover is significantly reduced. This protection can give business owners peace of mind and help ensure the company's long-term stability and independence.
By transferring ownership to the employees, business owners can preserve the values, culture and vision that they have instilled in the company. EOTs enable business owners to leave a lasting legacy and contribute positively to the lives of their employees and the broader community.
Funding an EOT can be a complex process, and it's essential to consider various options and their implications. Here's an overview of how an EOT can be funded:
When funding an EOT, it's essential to engage professional advisers, such as solicitors, who are experienced in employee ownership to navigate the process and ensure the most suitable funding method is chosen. They can help assess the financial implications, risks and opportunities associated with each funding option and develop a tailored solution that best meets the needs of the business, the owner and the employees.
The taxation of EOTs and the associated tax implications for business owners, employees and the company are important considerations. Here are the options available for the taxation of an EOT:
These tax advantages make EOTs an attractive option for business owners seeking a tax-efficient exit strategy that also benefits employees and ensures the long-term success of the company. It's important to consult with professional tax experts experienced in EOTs to navigate the tax implications and ensure compliance with UK tax regulations.
An EOT is different from other forms of employee ownership, such as Employee Share Purchase Plans (ESPPs), which allow employees to purchase shares of the company directly.
In an EOT, employees have an indirect ownership stake in the company through the trust, which holds at least 51% of the company's shares. In an ESPP, employees can acquire individual shares of the company directly, and the level of employee ownership can vary significantly depending on the employees' participation in the plan.
EOTs provide employees with a controlling interest in the company, ensuring they have a say in the company's strategic direction through mechanisms such as employee councils or representation on the board of directors. In contrast, ESPPs generally do not grant employees significant control or decision-making power, as their shareholdings are typically smaller and more dispersed.
There are substantial tax benefits with an EOT model, such as capital gains tax relief for business owners when selling their shares to the trust, and tax-free cash bonuses for employees up to £3,600 per annum. ESPPs, on the other hand, may offer some tax benefits, such as favourable tax treatment on share gains, but these are generally less significant compared to EOTs.
Employees do not need to invest their own money in an EOT to acquire shares in the company, as the trust purchases the shares on their behalf. In an ESPP, employees need to use their own funds to purchase shares, either at a discounted price or through payroll deductions.
EOTs are required to treat all employees equally, regardless of their role or length of service. This fosters a more inclusive and fair work environment. ESPPs, while offering potential financial benefits, can lead to disparities in share ownership among employees, depending on their financial situation and willingness to invest in the company.
An EOT can be more complex to set up and administer, as it involves the creation of a trust, the appointment of trustees, and ongoing management of the trust. ESPPs are typically more straightforward, as they involve a direct share purchase arrangement between the company and the employees.
While EOTs offer several benefits for business owners and employees, there are potential downsides to consider when deciding whether to establish an EOT in the UK. Here are some potential disadvantages:
Business owners should carefully weigh the potential benefits and downsides of an EOT, taking into consideration the unique circumstances of their company, before making a decision. It is worth consulting with professional advisers experienced in employee ownership to navigate the process and address potential concerns.
EOTs can be a suitable option for various types of companies in the UK. However, certain characteristics make some companies better suited for EOTs than others. Here are some factors that can indicate a company is well-suited for an EOT:
While these factors can indicate a company is well-suited for an EOT, it's essential to engage professional advisers experienced in employee ownership to assess the company's unique circumstances and determine the most appropriate course of action.
Setting up an EOT for your company involves several steps. It is a complex process, and it is essential to get expert advice from solicitors experienced in employee ownership, to help guide you through the process. Here's an outline of the steps involved in setting up an EOT:
It is vital to consult with experienced solicitors throughout the process to ensure a successful transition to employee ownership.