Is an employee ownership trust the right move for your business?

Is an employee ownership trust the right move for your business?

As one of the fastest growing business models in the UK, Jonathan Scott discusses why more businesses are making the move to employee ownership and the benefits that come with the structure.

Whether it’s to instigate a more collaborative culture in your organisation; to incentivise your team or to start planning for the legacy of your business, more businesses implementing employee ownership trusts.

As one of the fastest growing models of business ownership, last year alone there was a 150% increase in the number of new employee owned businesses.

What is an employee ownership trust?

Employee ownership trusts are a special form of an employee benefit trust. Introduced by the Government nearly 10 years ago, an EOT is a structure whereby a trust is placed above the company. Normally, this is the point at which existing shareholders would retire or continue as directors.

If you’re looking to attract, retain and incentivise your team, or to map out your business’ legacy, a move to employee ownership trust could be worth considering.

Why make the move to employee ownership trust? 

The reasons to make the move to EOT may vary between business owners, but some of the standout benefits include those for:

• Your team – One of the key reasons businesses choose to implement EOTs is to incentivise their team and attract the best talent within their respective industries. Bonuses of up to £3,600 per employee, per year, can be distributed as a tax-free profit by the EOT controlled company (it is worth noting that National Insurance does still apply).

By giving your team indirect or direct ownership of the business through an EOT, the structure also helps to increase engagement on the whole, by giving them more responsibility, a voice in how the business operates and setting a solid foundation for the future of the organisation.

• Your business – From a business-wide perspective, the advantages to implementing an EOT are vast. Research shows that year-on-year EOTs have a 4.5% increase in productivity; lower staff turnover and higher resistance to market volatility, which could be vital during these uncertain times.

• Your succession plan – Following the upheaval caused by the last three years, many business owners are now starting to plan for their exit. Whilst third party sales and management buyouts (MBOs) are popular exit routes, EOTs can be a really effective and tax efficient alternative, as any disposals made into the trust are free from both capital gains tax and inheritance tax

How it works in practice 

An employee ownership trust will need to be established with a company as the trustee of the EOT. The shareholders of the business will then sell their shares to the trustee company under a share purchase agreement.

The shareholders and trustee company will agree a valuation or purchase price, and on the sale of the shares, the price will then create a debt which is owed by the trustee company to the shareholders.

The company can then use disposable cash to make an initial payment, but it will need to continue to generate trading profits on an annual basis, which will then make contributions to the EOT. These contributions will be used to repay the outstanding purchase price which is owed to the shareholders.

Supporting your business with employee ownership trusts 

Despite the significant benefits that come with employee ownership trusts, setting an EOT up is a highly technical and complex process. It’s crucial to consult both tax and legal advisors before doing so, to ensure the transition goes smoothly.

Our team of tax advisors are on hand to advise you on the best options for your business’ future, or to answer any of your queries regarding EOTs.