Employee Ownership Trusts (EOTs)2024-06-13T11:15:34+01:00

Employee Ownership Trusts (EOTs)

There are plenty of high-profile employee-owned businesses such as John Lewis, but many business owners still don’t consider this model when they are exit planning. However, at The Smart Accountants, we’re now seeing an increase in demand for implementing Employee Ownership Trusts (EOTs) from businesses of many different sizes and trades.

EOTs can provide an alternative exit route to more traditional third-party sales or management buy-outs, where the ownership of the company is effectively sold to a trust (EOT). For many business owners, it can fill them with unease to leave the future of their business in the hands of a third party, but an EOT will allow the employees that help build the business, to retain control of its future.

What are the benefits of EOTs?

This isn’t an exhaustive list, but some of the key benefits of EOTs are:

  • Finding both a fair price for exit and willing buyers
  • Securing the succession of ownership
  • Retaining your company culture and values
  • Rewarding, retaining and motivating your staff
  • And of course, as accountants it would be a disservice if we didn’t mention: tax relief.

For answers to some of the frequently asked questions around EOTs visit: EOT Frequently Asked Questions

How can we help?

When delivering an EOT, we pull together a specialist team of 3 – 4 experts that will support you throughout, from the planning stage, through to implementation, taxation and post-implementation where required. Once we have had initial fact-find and advisory meetings and our proposal for the service is accepted by you, this would tend to follow through the below stages:

  • Valuation
  • Design
  • Tax Clearance
  • Taxation

We also work with EOT legal experts that help to support throughout, including:

  • Supporting the initial stage to confirm and discuss your objectives alongside The Smart Accountants
  • Communicating, engaging and training with your employee group, key stakeholders and the prospective EOT trustees
  • Preparation of all the legal paperwork
  • Acting as a trustee on the board of your newly formed EOT.

Beyond this, our partners at The Smart Accountants have vast experience in acting as trustees on behalf of the beneficiaries of the trusts, which in this case would be the EOT. So we can also support beyond the implementation if required.

For more information on Employee Ownership Trusts, please download our guide:
employee ownership

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“We recently explored our succession routes with UHY and ultimately, transitioning to an EOT with their assistance was the most attractive route. The key reasons behind this were it allowed us to retain our independence by not selling to a competitor, provide control to our founders over when and how to exit the business, and the ability to combine the EOT with EMI share option schemes. Of course, our staff were also a key reason and the EOT allowed us to reward them without them having to buy shares with their own funds and to increase engagement through this sense of ownership. Throughout the process, UHY were able to offer expert EO advice, which combined with their understanding of our business and partners to take care of the legal side, made the whole implementation process very smooth.”

Chris Jones, Coda Music
total negotiation group

“As our accountants and advisors, the Smart Accountants have always been on hand to support our business but recently they helped the sale of our business to an Employee Ownership Trust. Ultimately this transaction helped us with obtaining a fair price for the business, ensuring long-term succession, and rewarding our employees. The team supported us from the very initial advice and planning stage right through to the implementation and were on hand to offer their expertise throughout.”

Mark Cranstoun, Total Negotiation Group
db sharp & sons limited

“The team have helped us grow and become more professional. Dave has been invaluable in advising us. He has helped our accounts team so much and they now absolutely love Xero!”

David Sharp, D.B. Sharp and Sons Limited

“One of my previous headaches was always the absence of reliable management information and that often consumed my time unnecessarily. Since working with the team, they have implemented new systems, enhanced existing systems and they provide information on a monthly basis which is accurate and clearly communicated. This allows me to spend time doing what I should be doing.

Combine that with their sector expertise, knowledge and professionalism we would have no hesitation in recommending their services to anyone.”

Sheldon Paule, Cameron Kennedy

“We’ve always found the team to be responsive, helpful, and proactive in suggesting ways for us to improve our processes. In particular, we have been happy with the move from Sage to Xero, which has made our lives much easier as we grow our business.”

Jack Waley-Cohen, what3words

Meet our EOT Experts

Alison Price
Alison PriceTax Partner
Alison Price is a Tax Partner with over 20 years of experience. She is a Fellow member (FCA) of the ICAEW and a Chartered Tax Advisor (CTA). Alison started her career as an auditor in Surrey and later relocated to Cambridgeshire where she joined a local firm and specialised in providing tax advisory and compliance services to corporate clients, with a focus on owner-managed businesses.
In her free time, Alison enjoys outdoor activities such as hiking, climbing, and paddle-boarding.
Dave Hailey
Dave HaileyPartner - Head of Tech & High Growth
Dave is a Partner and heads up our Tech & Media department at The Smart Accountants. He has extensive experience in supporting tech businesses, whether they’re early-stage and pre-revenue or preparing to exit.
With over 15 years of practice experience, in addition to stints in both industry and the insolvency sector, Dave has built up significant commercial and business acumen. Dave spends time understanding his clients and the vision they have for their business, their key drivers and the challenges they face. This allows Dave to help them navigate the common pitfalls and to provide solutions to the challenges they face.

Outside of work, Dave enjoys playing golf and watching Tottenham Hotspur (although, don’t hold the latter against him!).

Our Blog and Resources

Employee Ownership Trust (EOT) FAQ’s

An Employee Ownership Trust (EOT) is a legal structure that allows a company’s ownership to be transferred to a trust on behalf of its employees. The trust then becomes the beneficial owner of the company’s shares, holding them for the benefit of the employees.

In an EOT, the company’s shares are sold by the existing shareholders( to the trust. In exchange for the shares, the EOT usually make an initial payment that will be funded by the trading company’s reserves (and sometimes supplemented by external funding) and then a debt for the remaining purchase price will be issued. This debt will be gradually repaid from the trading profits of the trading company which are then into the EOT and back to the shareholders.

In this new set-up, the trust holds the shares on behalf of the employees, who become indirect owners of the company. The employees may receive financial benefits, such as bonuses and a profit share, based on the performance of the company.

EOTs have several benefits for various stakeholders. For the sellers, they’ll be able to find buyers willing to pay a fair price and potentially benefit from tax relief on the consideration paid. Selling to an EOT, as opposed to a competitor, is also a way to help the owner retain their legacy as well as the culture and values they helped create. An EOT also provides the sellers a way to reward their employees that have helped make the business a success through ownership.

This ownership allows employees to receive a share of the profits and up to £3,600 in income tax-free bonuses each year. All of these benefits can also benefit the company with better employee engagement and governance, which studies have shown has ultimately led to better financial performance. Download our guide for a full overview of the benefits of an EOT.

No – we can work with you solely on advising on and implementing the EOT if you wish and can work with your existing accountant where appropriate. Whilst we can act as an independent trustee for the EOT after it’s implemented, this can also be your existing accountant if preferred. In short, we can be flexible with existing relationships and your requirements.

Commonly, sales to an EOT would involve an initial consideration with the remainder of the consideration to be paid from the trading company’s profits over a set timescale. When we implement an EOT, this would also include financial modelling within the planning phase which establishes how the payment structure of the sale of the EOT could work. In our experience, commonly the full consideration will be paid out between 5 – 7 years, but it can be a shorter or longer timeframe and is bespoke to the circumstances and requirements of the seller(s) and the business.

Yes, the exit and payment timeframes can be tailored to each shareholder and we would help establish the structure of this within the planning and financial modelling of the EOT.

All employees of a company can benefit from an EOT. This includes both current and future employees, as the trust holds the shares on behalf of all eligible employees. As well as the culture, this share in the profits can make it easier for an employee-owned business to attract new talent.

Yes, there can be tax advantages to implementing an EOT. For the selling shareholders, providing conditions are met such as the majority ownership being sold to the EOT, they would pay no capital gains tax on the consideration received on the sale of their shares. For employees, this includes the ability to be paid up to £3,600 bonuses each year that are income tax-free.

Ownership is typically transferred through a sale and purchase agreement between the selling shareholders and the EOT. The purchase price can be paid upfront or over a period of time, and it is usually based on the fair market value of the shares. It’s more common, however, for an initial consideration to be paid and then loan notes issued so that the remainder of the consideration is paid from the company’s profits to the selling shareholders over an agreed timescale.

No, shareholders cannot be forced to sell their shares to the EOT. Participation in the EOT is typically voluntary, and shareholders may choose whether or not to participate. However, it should be noted it requires over 50% of the shares to be sold to the EOT to qualify for the tax benefits i.e. the business needs to be majority employee-owned.

With an EOT, the trading company is still regulated by its Articles of Association and it’s still controlled by the Board of Directors. However, the key change is the creation of the trust, but also a Corporate Trustee which is controlled by the appointed Trustee Directors to act collectively as the trustee of the EOT.

These Trustees have a fiduciary duty to act in the best interests of the employees, so they will be involved in any major decisions. It’s also likely that the Trustee Directors include:

-An employee representative
-A seller representative
-An independent trustee, such as one of the EOT experts at The Smart Accountants

All of these representatives will be involved in the decision-making process to ensure the group acts in the best interests of the employees. A full overview of the structure and the roles of the trust and the board are covered within our EOT guide.

When an employee leaves the company, they’ll no longer benefit from the EOT.

In the latest statistics by the Employee Ownership Association, they found the top 5 sectors for employee-owned businesses were:

  • Professional Services (39.1%)
  • Construction (15.1%)
  • Manufacturing (13.6%)
  • Wholesale and Retail (11.4%)
  • Information & Communication (8.1%)

That said, EOTs can be used across all types of businesses and industries. However, the feasibility and suitability of an EOT will depend on various factors so it’s important to speak to an expert that can provide tailored advice that is bespoke to the goals of all stakeholders.

Whilst John Lewis provides a great example of how successful the employee-owned model can be, it likely adds to the misconception that the employee-owned model is mainly for large businesses. However, this can be an attractive model to smaller businesses and SMEs and research has shown that productivity gains are potentially higher within smaller firms.

Yes, there are legal requirements and regulations that govern EOTs such as the Employee Ownership Trusts Act 2014, so it’s important to have both an accountancy partner and a legal partner. By working with The Smart Accountants, we can make an introduction to an expert EOT legal partner so that between both parties, we can provide the full end-to-end service from advising on the EOT through to implementation and beyond.

Yes, an EOT can be used as an exit strategy for business owners. By selling their shares to the EOT, owners can achieve a smooth and gradual exit from the business, while ensuring its continuity and preserving the interests of the employees. Within our guide, we outline the pros and cons of an EOT vs a management buyout (MBO) and a traditional trade sale.

Case studies and research, such as the research within the Employee Ownership Effect report, have found that a move to employee ownership has a positive impact on company culture and employee morale. By providing employees with a sense of ownership and involvement in the company’s success, EOTs can enhance employee engagement, loyalty, and motivation. They can foster a collaborative and inclusive work environment, where employees feel more invested in the company’s long-term goals.

Yes, there are several successful companies that have implemented EOTs. John Lewis is the largest and perhaps most famous employee-owned company in the UK, beginning the steps to employee-owned back in 1929. Other notable examples include Mott MacDonald, a global engineering and management consultancy group, Arup, a global engineering firm, and Scott Bader, a specialty chemicals company. These companies have demonstrated the viability and success of the EOT model across different industries and business models.

It’s not uncommon for an Enterprise Management Incentive (EMI) scheme to be implemented immediately after the implementation of an EOT. An EMI scheme is a type of share option scheme (which you can read more about within share options guide here) that allows companies to offer share options to key employees. This is used in conjunction with an EOT, as it helps to retain key employees that are future to the success of the business and in turn, helps protect the risk around the sellers receiving any remaining consideration owed to them over the coming years. We cover this, as well as the key differences with the valuations for the EOT and any potential EMI schemes, within our EOT guide.

Yes, the new shareholders are able to sell these shares back to the EOT in the future. The EOT structure also provides them with certainty that there is a willing buyer of the shares (i.e. the EOT).

Usually, the alternative exit routes to consider are a Management Buy Out or a traditional trade sale. We cover the pros and cons of each of these within our comprehensive EOT guide.

After a company has transitioned to be owned by the EOT, it can pay employees of the trading company income tax-free bonuses of up to £3,600 each year. However, all employees must be included on the same terms. Companies also cannot reduce the employee’s salary due to this bonus.

The price for the shares of a company selling to an EOT would be determined by an independent valuation, for example, by The Smart Accountants. This means that unlike trade sales, where negotiations can result in a discount being applied, it’s easier to achieve a fair price for the sale to an EOT.

There are a couple of key requirements to consider when answering this question. Firstly, the ‘all employee benefit’ requirement, which means that all eligible employees should benefit from the EOT. This excludes those that hold (or previously held) 5% or more of the trading company. It is possible (and common) to also exclude employees with 12 months or less continuous service.

However, whilst all eligible employees must benefit from the EOT, this doesn’t necessarily mean the same amount needs to be paid, but it does need to be on the ‘same terms’ thanks to the ‘equality requirement’. By ‘same terms’, this means that employees participate on the same terms but the size of the distribution could be determined by one of the following:

  • Length of service
  • Remuneration
  • Hours worked

In short – the answer to this question is yes. However, there are consequences that should be considered. In our experience, EOTs are normally implemented to hold shares in the trading company on a long-term basis. That said, we appreciate that there may be unexpected circumstances in which the trustees of the EOT decide to sell the shares in the trading company to a third party. Firstly, it’s important to note that this will end the EOT and in turn, give rise to adverse tax consequences which we’ll discuss below.

For the sellers, they risk this subsequent sale breaching the qualifying conditions of the EOT, in that the EOT needs to remain an EOT by the end of the following tax year in which it’s sold to an EOT. Effectively, the EOT needs to continue to control the trading company for a maximum of two years for the sellers to benefit from not paying Capital Gains Tax (CGT) on the consideration. If this is breached, CGT will be payable at the normal rates.

Once the sellers’ risk period has passed, the EOT is deemed to have taken over the shares of the trading company from the sellers and the risk moves to the trustees of the EOT. A base cost for the shares would need to be arrived at, which could be the nominal amount paid for the shares on incorporation. At the time of writing (2022/23), 20% CGT would be charged on the gain, which is the proceeds less the base cost. If any deferred consideration is still owed to the sellers this would still be paid, but the remaining balance is then due to be paid to the employees/beneficiaries in the form of a cash bonus.

This cash bonus would attract both income tax and National Insurance Contributions (NIC), a far higher tax rate than the more favourable CGT rates. Of course, if the payout is a very large one, employees may be able to stomach the high effective tax rate and the other risks associated with the sale (e.g. job security, loss of culture etc.) but trustee directors must ensure they satisfy their fiduciary duties and the sale is right for the business and its employees.

The Next Steps

If you would like further information on EOTs and to discuss how we can support, please get in touch and one of our EOT specialists will be happy to talk to you.

Please call us on 0845 606 9632, email us at team@thesmartaccountants.co.uk or complete the contact form below.