What are the qualifying conditions for an EOT?

At the core of the EOT’s framework is the principle of employee benefit. For a trust to qualify as an EOT, it must operate for the benefit of all employees on an equal basis. This does not mean that every employee must receive the same financial benefit, but rather that all employees, irrespective of their roles, must have the potential to benefit from the trust. This inclusive criterion is designed to ensure that the trust’s purpose aligns with its overarching goal of fostering employee ownership and participation.

By Chris Davies

One of the key conditions for establishing an EOT is that the trust must acquire a controlling interest in the company. Specifically, this means the trust must own more than 50% of the company’s ordinary share capital, have the majority of voting rights, and be entitled to the majority of profits available for distribution. This condition ensures that the EOT holds meaningful control over the business, safeguarding the company’s direction and objectives in the hands of the trust.

It is also essential that the business’s trading status aligns with the requirements for an EOT. The company must be a trading company, or the principal company of a trading group, for the trust to qualify. This ensures that the tax benefits associated with EOTs are limited to active businesses that contribute to the economy, as opposed to investment or holding companies.

How are EOT benefits allocated?

Another important consideration is how the trust allocates benefits to employees. To meet the qualifying conditions, the EOT must distribute any benefits or payments to employees on a broad and equal basis. While this does not preclude differences based on factors like salary, length of service, or hours worked, it does mean that the allocation of benefits cannot unfairly favour a specific subset of employees, such as directors or shareholders. This condition reinforces the democratic ethos that underpins the concept of employee ownership.

In addition to these structural and operational conditions, there are tax compliance requirements that must be met for the EOT to qualify. When the trust acquires shares from existing shareholders, the transaction must be structured to ensure eligibility for Capital Gains Tax relief. This can provide significant tax advantages to selling shareholders, making the EOT an attractive option for business owners planning their exit strategy. However, the tax implications and structuring must be carefully considered to avoid unintended consequences.

Finally, it is worth noting the importance of timing and proper implementation. Establishing an EOT requires a thorough understanding of the legal, financial, and operational aspects of the business. The transition process should be carefully planned, often with the involvement of legal, tax, and financial advisors, to ensure all qualifying conditions are met and the long-term success of the EOT is secured.

For business owners considering an EOT, the process may seem complex, but the benefits can be substantial. By meeting the qualifying conditions and adopting this ownership model, companies can secure their future, enhance employee engagement, and take advantage of significant tax reliefs. Whether you’re exploring succession planning options or looking to embrace a more inclusive ownership structure, understanding the qualifying conditions for an EOT is the first step in making this transformative decision.

If you would like to talk to one of our EOT specialists please do get in touch.