How the employee ownership trust works

Essentially, the Trustees replace the shareholders and interact with the management team in the same way.

When ownership transitions to the employees, everything changes, and yet, nothing changes.; meaning that the ownership changes; however, day-to-day operations don't. The management team continues to run the company; however, the trustees of the trust ensure the company is well-managed and maximises employee engagement. Essentially, the trustees replace the shareholders and interact with the board of directors in much the same way. The trustees only get involved in the big decisions, such as the acquisition of significant assets, appointing Directors, arranging finance, or decisions that contravene the agreed-upon business plan.

The Employee Ownership Trust (EOT)

Employee ownership improves engagement and collaboration

The management board may report to the trustees three or four times a year, especially when big decisions or issues relating to employee welfare need to be made.

The trustees hold the trust's assets, comprising the company's shares, for and on behalf of the beneficiaries as set out in the Trust deed.

The consideration is repaid using post-tax distributable reserves via the trust. Loan note repayments are tax-free; however, income tax is due on any interest charged. Staff bonuses are paid via the company, not the trust.

To qualify as a tax-advantaged employee ownership trust, specific criteria must be met:- Trading requirement – the company must be trading at the time of disposal and not include any substantial elements of investment or non-trading activities. It must continue to fall under this trading requirement for a period of time after the transfer.

• All employees must be beneficiaries of the trust

• Employees must be treated equally in the distribution of profit-share benefits; however, the board of directors no longer need to be included.

• Trustees are allowed to allocate profit shares based on:

  • A multiple of salary

  • A flat payment

  • Pro-rating

  • Years of service

  • Qualification period

How the employee ownership trust works

In most cases, a corporate trust company is formed, and the trustees are appointed to the company as directors, limiting their personal liability. This arrangement also enables trustees to be removed and appointed. One of the benefits of an Employee Ownership Trust is that the trustees and the employees are not exposed to personal liability for the purchase price.

The trust's trustees typically comprise the previous owner, a representative of the employees, and an independent trustee who is neither an employee nor a founder. Excluded participators and connected individuals (former owners and connected family members) must not represent more than 50% of the trust board. The EOT will normally seek to preserve some legacy company values and values important to its employees moving forward.

Previous owners can continue to serve as Directors, Trustees, employees, or consultants; however, current and former owners cannot be beneficiaries of the trust, meaning that should the company be sold in the future, they would not receive an equal share of the proceeds. Trusts tend to waive the rights to dividends as they are not tax-efficient.

Some vendors make allowances for the employees to sell the shares of the company should the option arise in the future; however, the company would have to achieve significant growth for this to become mutually advantageous.