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What is an Employee Ownership Trust, or EOT and why would you have one?
You can set up an EOT to purchase the shares in your company and the EOT will hold them on behalf of your employees. Special tax breaks were introduced for EOTs to encourage more employee-owned companies.
Why would you create an EOT? You would normally do this as part of a planned exit from your business usually because you believe employee ownership would suit the culture of the business or you wish to protect the business from a future buyer of the business who may make the employees redundant and transfer the business to another part of the UK or overseas.
What makes an EOT a good option?
Your business will benefit!
If you’re planning to set up an EOT, you can rest assured that statistically, businesses with this structure do better, and are more resilient economically. The owners of the business, that is, the employees are more invested in the business doing well, so they drive innovation, they feel better about coming to work, and they take fewer sick days
Helping your staff to understand exactly how the structure works before you make the transition encourages their buy-in and makes the transition a smoother, more positive process. If you’re looking to retire from your business and want to ensure that the business continues with the values you’ve spent years building up, then an EOT can be part of your retirement solution: the great people who you’ve chosen to work with you over the years will continue to bear the torch after you’ve retired.
There are useful tax benefits
Essentially, if you sell or gift shares to an EOT you get full Capital Gains Tax Relief, which you need to claim on your tax return. To be eligible for full capital gains tax relief you must dispose of at least 51% of your shareholding. There’s also a bonus of £3,600 which is payable every year to ‘all eligible employees’, which is exempt from income tax. Certain transfers into and out of an EOT can also be eligible for Inheritance Tax Relief. The complexities of UK tax law mean that there are caveats and certain conditions that must be fulfilled in order to claim the relief; the good news is that Henderson Loggie’s team of experienced experts are on hand to help you every step of the way.
How should the EOT be financed?
The EOT purchases your shares and will hold them on behalf of the employees. There are different ways to finance the EOT – you can fund it with capital from your business so the EOT can pay the purchase price to the departing shareholder in tranches. You can fund it with a combination of capital from the business and a loan from a third party, i.e., bank and pay for the shares using a combination of business capital and the loan (it’s unlikely that a bank will front up 100% of the funding). Funds can be paid to the exiting shareholder in tranches and detailed cash flow projections should be prepared to assist the business manage its payments to the departing shareholder. Henderson Loggie’s corporate finance professionals are able to help with this.
Who do you need onside when you’re setting up an EOT?
First and foremost, you need to have an accurate valuation of your business. You also want advisors who can deal with corporate finance and tax. You also need good lawyers so that you can be sure that the Trust and all the legal documentation is set up properly. If you’re transitioning from personal to employee ownership, it’s also useful to have an extended period of consultation to ensure that all employees and your senior team know exactly what the benefits of an EOT are so they can buy into the concept.
How do I make sure the EOT runs smoothly?
When you set up the EOT via a Trust Deed, you will need to appoint Trustees to manage it, as the EOT holds the shares in the business on behalf of your employees. You can also create an employee council to represent the interests of your employees. This helps ensure effective communication between them (the owners of the business) and the directors of the company (who are running the business)). It also makes sure that the directors are held accountable for the successful running of the business.
Let’s wrap up
You can rest assured that Henderson Loggie has seen many transitions to employee ownership and has years of experience in helping many businesses and business owners.
For many businesses, establishing an EOT is a major transition and quite a rollercoaster ride, emotionally speaking. But with Henderson Loggie’s great team of knowledgeable professionals alongside you, we can help you make this move with confidence and assurance that you’re paving the way for a brighter, more positive future for your business and its personnel.
Questions? Just complete the contact form below or call us on 01382 200055, and we’ll be right there as you take your next steps.