Employee Ownership Trusts – are they right for your business?

Ben Jackson, Senior Associate, Corporate

There are over 2,250 employee-owned businesses in the UK and counting, with a clear upward trend towards employee-ownership models across a variety of sectors.

Many well-known brands including John Lewis, Richer Sounds and Aardman Animations have adopted this approach to ownership, but in recent times organisations of varying sizes have taken advantage of Employee Ownership Trusts or “EOTs”.

Ben Jackson, Senior Associate in the Corporate Team at Hay & Kilner, discusses the potential benefits that flow from EOTs, as well as the importance of taking professional advice and ensuring this model is the right fit for your business.

What are Employee Ownership Trusts?

Employee Ownership Trusts (EOTs) are a specific type of employee benefit trust. A company becomes owned and, crucially, controlled by the EOT. A key condition is that a controlling interest in the company must be transferred to the trust. The EOT is operated by the trustees, who are compelled to act in the best interests of the employees.

Why consider an EOT?

For business owners, EOTs can offer a full or partial exit strategy and succession plan, as an alternative to a trade or private equity sale, whilst retaining an employee-led culture.

There are potentially significant tax advantages if the specified conditions are met, namely relief from capital gains tax. This makes EOTs an attractive solution for sellers. It is however vital for the practical reality of an EOT to be consistent with the culture of the business and the expectations of the sellers. The purchase price is often deferred for a significant period of time, relying on the profits of the company to meet the liability.

The potential advantages for employees are twofold. The EOT is formed for the benefit of the employees, the rationale being that there is a fundamental change in ownership structure, together with a shift towards the company being operated in the interests of the employees. Employees can gain enhanced influence over the direction of the company, driving engagement and employee empowerment. There are also potential tax benefits for employees, who may receive annual tax-free bonuses of up to £3,600.

For the right business, an EOT can offer a sustainable and collaborative approach to company ownership, with significant associated tax benefits.

Government Consultation

In July 2023, the government published a consultation on the Taxation of Employee Ownership Trusts and Employee Benefit Trusts. This was designed to ensure these regimes remain focused on the objectives of rewarding employees and encouraging employee engagement. There were a number of helpful points of clarification and an implicit indication that EOTs are here to stay.

How can Hay & Kilner help?

Hay & Kilner can offer multi-disciplinary services at every stage of a transition to an EOT in collaboration with your tax advisors. Our Corporate and Private Client & Trust teams can help you understand and implement employee ownership, taking the time to explore and achieve your objectives.

Setting up and operating an EOT can be complex and requires careful planning and execution. Engaging with your advisors as early as possible to explore the best possible route for your business is crucial to ensure to ensure a smooth and compliant process.

For further information on EOTs or any other corporate matters, contact Ben Jackson on 0191 232 8345 or via ben.jackson@hay-kilner.co.uk.