What are the benefits of an EOT?
An Employee Ownership Trust (EOT) can benefit exiting shareholders, business owners and employees. We explore the benefits and if it could be right for you.
Shareholders can transfer majority ownership of a trading company to a trust specifically created for the benefit of its employees with no charge to capital gains tax in respect of the shares sold.
What is an Employee Ownership Trust?
An EOT is a type of trust often set up by a company’s existing owners as part of an exit planning strategy which enables employees (who are beneficiaries of the EOT) to acquire a majority stake in the company.
The EOT must acquire more than 50% of the share capital of the company and provided the various conditions are met, an EOT can offer significant benefits to owners and employees alike which are summarised below.
Benefits for business owners
Business owners selling a majority of all issued shares in a company to an EOT can do so free of capital gains tax.
The purchase price for shares can include deferred consideration, meaning the company can fund future deferred consideration instalments from future profits.
Benefits for employees
There are also benefits for employees. A company owned by an EOT can pay annual bonuses of up to £3,600 to its employees free of income tax.
As beneficiaries to the EOT, employees can receive benefits typically restricted to shareholders.
Key features
- Applies to “trading” companies only or the parent company of a trading group
- The EOT will typically have a corporate trustee, whose directors may include: executive directors of the target company, employee representatives, seller(s) and a professional trustee.
- Following the sale, the EOT must hold a controlling interest of over 50% in the company.
- Only shares sold to the EOT in the financial year that the EOT gains a controlling of the company will qualify for the nil rate charge to capital gains. Any acquisitions in subsequent years would be charged at the effective rate at the time of the disposal.
- The EOT must hold their shares for a minimum of 12 months following any acquisition.
- Valuation advice will be required to support the company valuation and share consideration.
- EOT structures often include the introduction of debt in to the company structure to facilitate initial payments of consideration for the shares.
- The payment of consideration for the sale shares can be structured to include an upfront payment combined with a structure of deferred payments that are paid out over a set period of time and linked to the company’s ongoing profitability.
- Profits must be shared equally between employees, meaning they must be distributed between all eligible employees on substantially the same terms, subject to certain limited exceptions.
- Certain key requirements must be present for a minimum period following completion of acquisition of the company by the EOT. Failure to comply with such requirements could result in a loss of the nil rate of capital gains tax.
How can Blake Morgan help?
Our clients have benefited from having EOTs set up. If you are looking to start an EOT sale or restructure, our experts can help from the planning stage through to implementation. Blake Morgan have significant expertise in advising parties on EOT transactions and if you have any queries please contact our specialist lawyers.
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