What are the advantages of an EOT?

An Employee Ownership Trust (EOT) is a specific type of employee benefit trust, which is created to enable a trading company to become owned by its employees.

Employee ownership offers a compelling option for business owners seeking to sell or partially exit their businesses as part of succession plans. With this in mind, Graham Spalding,  head of Lodders’ Business Services group, highlights some key advantages of an EOT.

How does it work?

The existing owners of the company set up the EOT, with a newly formed trustee company typically handling the purchase of shares on behalf of the trust. Employees, former employees, and select relatives and dependents can benefit from the EOT, although they don’t directly own the shares. These are held by a trustee company, with employees designated as beneficiaries. Meeting certain requirements is necessary for both owners and employees to take advantage of the EOT. There are several qualifying conditions that must be met for this structure to work and for the tax relief to be available to the sellers. Breaching the qualifying conditions can have consequences for both the seller and the EOT.

Key advantages of an EOT:

• Employees are invested in making the company a success for the future, leading to better engagement and higher staff retention.
• Employees can be paid tax-free bonuses of up to £3,600 each per year, subject to national insurance contributions.
• There is no Capital Gains Tax on the transfer of shares to the EOT, as long as the EOT acquires a controlling interest in the trading company and subject to qualifying conditions.
• Shareholders have an exit route where there is no third-party purchaser.
• Owners can also map out their path to retirement, without needing to fully exit straight away.
• In addition, sellers can sell their shares at market value, with greater certainty of completion as they control the major aspects of the transaction.

Our fast-growing Business Services group has a strong reputation for providing pragmatic legal advice on a range of business issues. To find out how we can help you, please speak to our team.

This article first appeared in Lodders Life Issue 10. Click here to read Issue 10 in full.