Hero
Independence Exits

What is an Employee Ownership Trust (EOT)?

What is an Employee Ownership Trust (EOT)?

An Employee Ownership Trust (EOT) enables a business to transfer ownership to a trust that holds shares on behalf of its employees. It offers a tax-efficient succession model while preserving the company's culture and aligning employee incentives with business success. EOTs have become an attractive alternative to traditional sales, particularly in the UK, where they benefit from supportive legal and tax frameworks.

Rules of an EOT

To qualify as an EOT and gain tax advantages, specific criteria must be met:

  • Control Requirement: The EOT must acquire and hold a controlling interest (more than 50% and up to 100%) in the company.
  • All-Employee Benefit: The trust must benefit all employees on the same terms, though variations based on factors like salary or length of service are allowed.
  • Independent Trustees: The trustees must act in the best interests of the employees and cannot include a majority of connected persons to the former owners under the new 2024 rules.
  • UK Residency: The trust and its trustees must remain UK-resident for tax compliance, both at the point of sale and for four subsequent years.
  • Market Value Requirement: Shares must be sold at a fair market value determined by independent valuation.

Structuring EOTs can be complex, as there are consequences to many of the key decisions made at structuring stage and including but not limited to how the EOT is funded, which itself is a fluid area of development with more and more funding permutations possible.

Changes in the 2024 Autumn Statement

The UK government introduced changes in the 2024 Autumn Statement to enhance EOT integrity and ensure the model remains focused on employee benefits:

  • Trustee Independence: Former owners and connected persons can no longer form a majority of trustees, enhancing governance neutrality.
  • Extended Disqualifying Event Period: The period during which CGT relief can be clawed back is extended from one year to four years, providing greater scrutiny of post-sale arrangements.
  • Reasonable Steps for Valuation: Trustees must demonstrate they took reasonable steps to ensure the purchase price represents market value. Failure to do so invalidates tax relief.
  • Trustee Residency: All trustees must be UK-resident for at least four years following the transfer to maintain tax compliance.
  • Enhanced Reporting: Businesses must disclose additional details during CGT relief claims, such as the employee benefit structure and governance arrangements.

Roles of Trustees in an EOT Structure

Trustees play a vital role in an EOT. They act as custodians of the shares and ensure decisions align with the best interests of the employees. Their responsibilities include:

  • Overseeing the company's adherence to the EOT framework.
  • Ensuring profits are distributed equitably among employees or reinvested for growth.
  • Representing employee interests in significant business decisions.

Trustee Topco vs. Operating Company

Trustee Topco:

  • A holding entity owning the shares on behalf of employees.
  • Focuses on governance, compliance, and oversight.
  • Operates independently of the company's daily business activities.

Operating Company:

  • Manages the day-to-day operations of the business.
  • Often retains its existing management team to continue running the company as before.

Minimal Day-to-Day Impact

In most cases, transitioning to an EOT involves minimal disruption to daily operations:

  • Employees remain in their roles with no direct ownership responsibilities.
  • The management team continues to lead the business, ensuring operational continuity.
  • Topco provides governance and oversight, focusing on compliance and aligning operations with employee interests rather than intervening in daily tasks. This can often be as light touch as 3-6 Board meetings per annum and no limit to the extent to which the Trustee company becomes part of day-to-day operations.

Advantages of an EOT Structure

Tax Efficiency:

  • Sellers benefit from CGT relief on qualifying disposals (0% instead of 24%+)
  • Employees receive tax-free bonuses of up to £3,600 annually. A key differentiator in low wage sectors and high competition markets

Business Legacy:

  • Preserves company culture and values.
  • Avoids the disruption often associated with external sales.

Employee Engagement:

  • Aligns employee interests with company success, improving morale and retention.

Flexibility in Financing:

  • Can be funded through deferred payments, external debt, or hybrid models.

Real-World Examples of Employee Ownership

  • John Lewis: The retail giant
  • Riverford Organic Farmers: Transitioned to employee ownership to secure its mission-driven ethos.
  • Arup Group: An exemplar of employee-owned success in engineering and design.

Conclusion

EOTs are a robust succession model that balances the interests of business owners and employees. The changes in the 2024 Autumn Statement reinforce the structure's integrity, making it a secure and sustainable pathway for transitioning ownership. With governance oversight by trustee topco and minimal operational changes at the ground level, EOTs ensure both stability and long-term employee benefits.

For businesses considering this path, the appointment of an advisor who has extensive EO experience is recommended and the scheme is also considered as part of a wider Review of Options so that shareholders can make decisions with full context and clarity.