What is an Employee Ownership Trust?

The structure of an EOT can take many different forms, depending on what would be appropriate to suit the given objectives and management style of the company transitioning to an EOT ownership structure. 

However, current thinking has common themes regarding the best EOT structure.

One common feature is that the EOT will have at least three individual trustees or a single corporate trustee; usually a company limited by guarantee, with at least three directors.

It is considered best practice for these individuals (trustees or directors) to include at least one:

• representative of the current employees (who are not on the company’s board of directors); and
• an independent trustee/director.

Often, the third trustee/director is a director of the trading company.

The tax rules surrounding EOTs contain a number of restrictions that need to be carefully considered when establishing the management structure and constitutional arrangements.

In particular, there is a restriction on the former owners of the company retaining control through the EOT structure. For this reason, it is best practice that the board members of the trading company do not make up most of the EOT trustees/directors.

The prior business owners often want to stay involved and have a voice/representative at the trustee level.  This makes the role of the independent trustee extremely important to maintain the balance and autonomy required by the legislation governing EOTs.

In a summary, there are two key tax benefits associated with EOTs, as follows:

• capital gains tax exemptions; and
• income tax advantages for employees.

Individuals who dispose of a controlling interest in a trading company to an EOT will benefit from 100% relief from Capital Gains Tax (CGT) on the disposal, provided certain conditions are adhered to. 

The Autumn Budget 2024 increased the CGT rates, which are now 18% (lower rate) and 24% (higher rate); there is, therefore, a significant tax advantage to current business owners who are looking to exit and are interested in exploring the prospect of employee ownership. 

For employees of a company which is owned by an EOT, the company is able to pay an annual bonus to each employee of up to £3,600 which is free of income tax, although these bonus payments will remain subject to National Insurance Contributions.

There is also relief from inheritance tax on certain transfers into and from an EOT.

The aforementioned tax benefits are subject to certain qualifying criteria and strict adherence to certain conditions, you should therefore seek advice from a tax adviser to ensure that your company meets such criteria.