Employee Ownership Trusts (EOTs)Posted 2021 by Chris Davies
Succession and extraction of value built up in the business is a problem for many business owners.
But what if you could sell your business, extract the value, and pay 0% tax? Wouldn’t that be good?
Imagine this scenario: You’ve built a successful business, and now would like to leave the business, retire or just step back. Perhaps you don’t have anyone who you wish to leave it to, and you definitely don’t want to sell it to an asset stripper. Selling the business to a competitor or customer may seem like a good alternative, but there are no guarantees that they won’t steal your information and clients before completion, or even lay off your staff, and the sale process itself may become costly, difficult and time-consuming, just at the point where you’re looking for an easier life.
You respect your staff, maybe you even feel an obligation to their future or think of them as friends, and would like to feel that you are doing the right thing by them.
An Employee Ownership Trust or EOT could very well be the solution to your problem. An EOT is a trust set up for the benefit of the employees, managed by the trustees, similar to the John Lewis model.
The Trust offers to buy the shares normally on deferred terms over say 5 years. The company pays the Trust an initial down payment using surplus cash in the business which is then passed to the business owner as part payment for the shares. Over the next 5 years the company makes a payment out of profits to the Trust which then pays this to the business owner. At the end of the 5 year period the shares have been paid for, effectively from the company’s own profits.
What is the benefit of an EOT to the owner?
- If the trust purchases over 50% of shares in the company, then the sale by the business owner to the trust is TAX FREE!
- It’s less stressful than selling to a third party
- You can stay part of the business and as involved as you wish to be
- You can still earn a salary from the company for the work you do
- Company information stays within the business and is not compromised by handing it to third parties
- Staff jobs are secure
- Employees are empowered and motivated to perform, and can receive an annual bonus based on hours, length of service and remuneration, of which the first £3600 is tax free
How to set up an Employee Ownership Trust
- Ask the company’s accountants for an independent valuation of the business
- Apply to HMRC for tax clearance (your accountant can do this for you)
- Appoint solicitors to prepare the trust deed and the share purchase agreement
What’s the catch and why isn’t everyone doing it?
There’s no catch , but not all accountants are confident or have experience in this area. You might be surprised to learn that the top 50 EOT businesses have a turnover of £20 bn and employ over 160,000 staff. At UHY Ross Brooke, we have helped several of our clients by setting up Employee Ownership Trusts and they have very positive feedback on how easy it was.
Get in touch
If you would like to find out more about Employee Ownership Trusts, please get in touch today with your nearest office.