Employee Ownership Trusts (EOTs)

Employee Ownership Trusts: securing your business legacy.

Despite successive changes to the original regime, Employee Ownership Trusts (EOTs) still offer an innovative approach to business succession. For the right business they provide benefits to both owners and employees, comprising an exit strategy for shareholders that can secure the company’s independence, culture and values, whilst creating a legacy that’s aimed at rewarding its staff.

Since the Finance Act 2014, EOTs have gained significant traction across various sectors thanks to attractive tax incentives. Qualifying arrangements can offer substantial benefits, including an effective 50% capital gains tax relief for sellers and the provision of income tax free bonuses for employees.

This has made EOTs an increasingly popular choice for business owners planning their succession.

At its core, an EOT creates employee collective ownership through a discretionary trust, established by the company in respect of which the employees form the class of beneficiaries. While employees don’t directly own shares, this structure aligns the employees’ interests with long-term business success.

For the owners, the purchase price is paid by the trust funded by the company’s existing distributable reserves and the future profits of the business (gifted to the trust) and can also be supported by bank debt.

In short, so long as the transition meets the 7 key qualifying criteria (expanded and amended following the 2024 and 2025 budgets), and is, otherwise, compliant with the relevant EOT rules, it offers the sellers the opportunity to transfer their business at a significantly reduced rate of CGT.

Whether you’re exploring succession options or looking to enhance employee engagement, our experienced team can help you understand if an EOT could work for your business. In partnership with other relevant advisors, we’ll guide you through every step, from initial assessment to implementation, ensuring your transition supports both your exit strategy and your company’s future success.

Benefits of an EOT

Benefits for business owners

• Tax Advantages: see more detail below
• Legacy Protection: maintain the company’s independence and preservation of its culture and values
• Talent Retention: Create a more engaging work environment with employees having a direct stake in the company’s success
• Business Resilience: when employees have a stake, they are more likely to go above and beyond to ensure its long-term viability, leading to greater resilience, lower employee absenteeism and greater productivity

Benefits for employees

• Financial Benefits: Indirect share in the company’s success
• Job Security:  being part of the business ownership creates a sense of loyalty and commitment, reducing employee turnover rates and enhancing job security
• Engagement: Greater sense of pride and responsibility, creating an innovative and creative environment, leading to better business outcomes
• Long-term Growth: promote sustainable growth and long-term value creation by aligning the company’s long-term success with the interests of employees

Key tax benefits

• Capital Gains Tax Relief: An effective 50% CGT relief on the sale proceeds from a qualifying transfer
• Income Tax Benefits: Tax-exempt bonuses up to £3,600 per year for employees
• Corporation Tax: Deductions available on qualifying bonus payments
• Inheritance Tax: Exemptions on certain transfers and trust charges

How we help businesses with EOTs

While EOTs offer significant benefits, establishing one requires technical expertise and careful navigation of complex legal and regulatory requirements. Our experienced team provides comprehensive guidance through:

• Structure and planning
• Implementation of the EOT (including settling the trust, transferring the company to the EOT and structuring the deferred payments)
• Regulatory compliance
• Documentation and governance
• Ongoing support and advice