Employee ownership trusts (EOT)
Employee ownership trusts enable business owners to sell their controlling interest in a company to a trust for the benefit of employees. With this arrangement, the owner will usually receive tax relief and there are potentially tax-free bonuses for the employees too.
Successful examples of this process include John Lewis, Richer Sounds and Arup. Each employee-owned company is different, and the structure should reflect the culture and ambitions of the organisation.
Employee ownership trusts are usually used as an exit strategy for controlling shareholders, but they are also an effective incentivisation tool. Once established and the shares have been transferred, the company can pay additional rewards to employees in the form of tax-free bonuses of up to £3,600 a year. Transferring shareholders may sell their shares to an employee ownership trust and claim exemption from tax on all capital gains.
The following key points should be considered.
- Most of the company’s ordinary shares will be transferred when the employee ownership trust is created. Transferring shareholders, the company and the trustees acquiring the share must receive specific tax and legal advice.
- Communication with employees, trustees and the current shareholders is a vital part of establishing employee ownership trusts and should be built into the planning.
- Original or family shareholders can stay involved through management committees or representation on the board of trustees.
We can provide support with all aspect of employee ownership trusts, including:
- setting up the trust;
- helping owners find finance;
- legal drafting of documentation and sale agreements; and
- structural advice on the governance structures, e.g., employee councils.