This note will briefly describe what an Employee Ownership Trust (EOT) is, the advantages and disadvantages of establishing an EOT to control your business and how Hamilton Blake can assist with the process.
EOTs are one of the most common methods of introducing employee ownership, the other being employee share schemes.
An Employee Ownership Trust is a tax incentivised mechanism that transfers control of the business for the long-term benefit of employees. It was introduced in its current form in 2014 when the Finance Act bought in new legislation to try and incentivise more employee ownership. The legislation was introduced to incentivise companies to sell out to employee-owned vehicles.
An EOT is a special statutory trust established by a trading company for the benefit of all its employees. EOTs are used to benefit all employees equally but distributions may consider remuneration level, length of service and hours worked.
An EOT does not mean employees directly own the shares; it means that the shares the trust holds will be ultimately used to the benefit of the employees at the point of a distribution an annual bonus distribution. That doesn’t necessarily mean it will be today’s employees; instead, it will be the employees in the business at the time of the bonus grant or on exit, i.e., it is employees as a body rather than individual share ownership.
EOTs are becoming increasingly more popular, the popularity of EOTs is driven both by the tax and employee benefits. Companies are introducing EOTs to provide permanent or long-term employee ownership of the company.
The advantages of establishing an employee ownership trust are as follows:
Along with the tax benefits for departing shareholders and employees the structure enables owners to release value from their business and implement a succession plan over the long term without bringing in an external third-party buyer or investor.
Below we have outlined a number of disadvantages of establishing an employee ownership trust:
A subsequent trade sale, management buy-out (MBO) or initial public offering (IPO) of the business can take place in the future and, since the EOT must act in the best interests of the employees, the trustee would support a future exit if it realised sufficient value for the employees. An exit strategy can be agreed with the EOT at the time it becomes a shareholder, as with any other investor.
Due to their tax advantages, there are a number of conditions that need to be satisfied by both the company and the trust in order for the EOT to be tax efficient.
To carry out a qualifying sale to an EOT there are key conditions the company must meet:
The trust which acquires the shares has to satisfy the following conditions:
Hamilton Blake can help with structuring the introduction of an EOT, including liaising with the appropriate corporate lawyers in preparing the documentation, agreeing a share valuation for the shares to be sold, and taking you through the entire process of introducing an EOT as the majority shareholder of your company.
Completing the process of establishing an EOT with Hamilton Blake can be split into the following steps:
Should you have any queries about the process or whether a EOT may the right route for you and your company then please do not hesitate to contact us.