What are Employment Ownership Trusts?

Quite simply, an Employee Ownership Trust (EOT) is where the employees of a company indirectly own and control the business through a trust. A well-known example of this is the John Lewis Partnership model.

Who uses an EOT?

Owners of a company who wish to sell their business in a tax-efficient manner and who also want to pass the business on to their employees to safeguard their jobs, the legacy and heritage of the company may choose to create an Employee Ownership Trust.

Benefits of Employee Ownership Trusts

  • EOTs are very advantageous from a tax perspective for both the owner and the employees. The owner could end up paying 0% capital gains tax on the sale, while realizing the full market value, and the employees can receive an annual bonus of which the first £3600 is tax free.
  • Owners and employees continue to benefit from the feelgood factor and goodwill they have built up together over the years.
  • Owners may continue their involvement in the business, with a smooth transition period.
  • Owners can rest-assured in the knowledge that their business will continue as they would wish it to, and not be asset stripped or subsumed into a competitor’s company.
  • The sale process is generally quicker and attracts lower selling fees.

Do you need an EOT specialist?

Setting up an Employee Ownership Trust is not straightforward and a thorough knowledge of the rules is required. Your existing company accountant or solicitor may not have the expertise. The good news is that we’ve set up Employee Ownership Trusts for several of our clients, and are happy to advise and support you too.

The process for setting up an EOT

  • Ask your existing company accountants, or UHY Ross Brooke to undertake an independent valuation of the business.
  • Decide how much of the business you wish to retain. This will affect your tax liability.
  • 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.

How does an EOT work?

  • Establish an EOT with the company as the trustee of the EOT
  • Shareholders sell their shares to the Trust. The price is based on the independent valuation of the company. This creates a debt owed to the shareholders.
  • Profits are transferred to the EOT which are then repaid to the shareholders over a period of time.

Next steps

Need a little more clarification? Get in touch with our Employment Ownership Trust specialists to understand how an EOT could be the best solution for your business exit strategy.

Find out more about an EOT:
Watch our video or read more