An Employee Ownership Trust, or EOT, is a trust is set up to own a controlling stake in a company on behalf of its employees. These employees are the beneficiaries of the trust. In other words, the employees become indirect owners of the company and enjoy many of the benefits associated with company ownership.

To encourage more businesses to adopt the EOT model, the government ensured that, for the right businesses and owners, the benefits would clearly set it apart from a trade sale or other exit route.

How does an EOT benefit the sellers?

One of the most quoted benefits of the EOT route for exiting shareholders relates to tax, but that isn’t the only area of benefit.

For business owners, succession planning is a major career decision. After years spent building a business, creating jobs and benefitting the economy – you want to make sure the right exit is chosen. Here are the key benefits of choosing an EOT.

• Tax Free: Subject to qualifying criteria, the sale of your shares to an EOT is not subject to Capital Gains Tax. That means the sale is effectively tax free.

• Full Market Value: EOT also means the shareholders are guaranteed to receive the full market value for shares sold (subject to independent valuation). That means no lengthy negotiations on price.

• Certainty of Exit: You also get certainty of exit, meaning your deal won’t be compromised by a trade buyer changing their delaying proceedings or moving the goal-posts part way through the deal.

• Secure your Legacy: An EOT enables you to secure your legacy as a business owner who prioritises the security and future prosperity of your team after your departure.

How an EOT benefits your employees

As you might expect, an Employee Ownership Trust is uniquely beneficial to the employees of your business, and these benefits are both financial and cultural.

• Indirect Ownership Stake: The employees, through the EOT, gain an indirect ownership stake in the company. They are not shareholders, but they do get a financial stake in the future of the business.

• A Meaningful Voice: Through the trust, employees are granted a meaningful say in how the business is run going forward.

• Tax-Free Bonuses: Providing qualifying criteria are met, every employee is entitled to an annual profit-share bonus of up to £3,600 – tax free.

• All Seniorities Benefit: The economic benefits of the EOT, such as the tax free bonuses, are enjoyed by every employee regardless of seniority.

• Improved Job Security: Trade sales or buyouts are often associated with restructuring and redundancies. An EOT helps reduce uncertainty following a change of ownership.

Important notes for employee benefits

In order for the employees to receive the £3,600 tax free annual bonus benefit, the EOT must meet some strict rules.

• The recipient must be employed by the company owned by an EOT.

• The bonus must be paid from the company’s profits.

• The bonus must be available to ALL employees.

Before Q4 of 2024, company directors had to be included in distribution of all bonuses. As part of a recent batch of changes to the EOT rules, companies can now exclude directors.

Senior management figures can still be incentivised with additional bonuses beyond those deriving from the EOT, such as share options, at the discretion of the trustees.

How an EOT benefits businesses overall

Beyond the exiting shareholders and the employees, there are several important benefits that EOT ownership provides for the business itself.

• Performance: Studies by the Employee Ownership Association have linked employee-ownership to improved business performance due to increased motivation and a longer term vision among employees.

• Sustainability: Employee-owned companies have demonstrated greater sustainability and resilience against economic downturns.

• Employee Retention and Attraction: Due to the various incentives and benefits it offers, EOT owned companies area more attractive to talented people, and can retain them for longer.

• Reduced Absenteeism: Employee-owned companies often see reduced levels of absenteeism owing to better working conditions and more focus on employee interests.  

Make sure you understand the pros and cons

For the right business and owners, an EOT presents a unique opportunity that benefits the business, its employees, and the exiting shareholders. However, it’s important to remember it may not be the best route for every business.

There are also strict qualifying criteria and failing to meet these during or after the transaction could see the valuable tax benefits removed or clawed back at a later date.

We encourage all business owners to fully review the pros and cons of an EOT to assess their eligibility before getting started.

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For more information on how EOTs work, who they are for, how they are structured, and qualifying rules, you can download our free EOT guide today.