What is an employee ownership trust (EOT)?

The Employee Ownership Trust was set up under the Finance Act 2014 to encourage companies to transition to employee ownership and is incentivised with tax relief for both the vendors and employees.

Employee Ownership Trust

An Employee Ownership Trust (EOT) is established when existing shareholders sell their shares to the EOT at a fair market value (FMV). The EOT acquires the shares using a combination of bank finance and/or vendor loan notes. In some cases, the entire consideration is funded by vendor loan notes.

This means that vendors can:

• Benefit from some consideration now

• Receive interest on future loan note repayments, maximising value.

The EOT must own more than 50% of the company’s shares and can acquire between 50 and 100% of the shares.

Once established, all employees must receive benefits from the EOT on the same terms, although more recently the board of directors can now be excluded from profit shares.

Typically, an EOT will acquire a controlling interest or 100% of the shares from the owners. The price will usually be agreed upon based on an independent valuation, and it cannot exceed the business's market value.

The company continues to be run by the management team. The Trustees ensure the company is well managed and maximises employee engagement.

Key benefits of an EOT include:

• Full Capital Gains Tax relief

• The fair market value (FMV) of your business

• Immediate purchaser with no competitor involvement

• Lower advisor fees with no succession issues

• No onerous earn-outs with fewer warranties and indemnities

• Tax-free employee bonuses up to £3600 per annum

• Greater employee engagement, innovation, and improved business performance

• Management and staff can benefit from employee share schemes