EOTS – Employee Ownership Trusts

15 January 2023

Tax free succession planning/Exit.

advice : Exit, Leadership and Tax

EOTs are the perfect opportunity for tax free succession planning/Exit. Read this blog and find out how they work and what are the advantages.

Employee Ownership Trusts are designed to encourage employee ownership of the company they work for. This government initiative promotes employee ownership by providing the opportunity for the existing owners to sell their shares to an EOT with very generous tax breaks.

What are the benefits of EOTs?

The key benefit for owners is that the sale of their shares into the trust can be made free from capital gains tax and inheritance tax. In addition, there is a “ready-made” buyer (i.e., no third party buyer is required) as the purchase is funded by the company.

The key benefit for employees is not only owning a stake in the business but also the EOT can pay annual bonuses of up to £3,600 free of income tax. A corporation tax deduction for those bonuses will be available to the company.

Other benefits include:

• Employee engagement & innovation encouragement at all levels;
• Share capital is still available to incentivise management and key employees; and
• Improves business performance by driving growth of stakeholder values.

How do EOTs work?

In order to sale to an EOT, you will need:

  1. To establish an EOT with a corporate as the trustee of the EOT (the Trustee Company).
  2. The shareholders to sell their shares to the EOT under a share purchase agreement.
  3. The shareholders and the EOT will require an independent professional valuation of the company as it must be sold to the EOT at market value. Finerva can assist with this valuation. On the sale of the shares, the purchase price will create a debt owed by the EOT to the shareholders.
  4. The company will continue to generate trading profits and it will use them to pay dividends to the EOT, which in turn will repay the outstanding purchase price owed to the shareholders.

You will also need to meet the conditions below to qualify:

• The company must be a trading company or the parent company of a trading group;
• The EOT must retain a controlling interest in the company (>50%);
• The number of continuing shareholders who are directors or employees must not exceed 40% of the total number of employees of the company or the group; and
• The EOTs shares in the company must be applied for the benefit of all employees on equal terms. However, the trustees are allowed to distinguish between employees on the basis of remuneration, length of service and hours worked.

If you need more information and how we can support you through this process, please get in touch with our expert team – we will be delighted to support your business!

Nothing on this page is intended to be or should be construed or taken as accountancy, investment, tax or any other kind of advice. We recommend individuals and companies seek professional advice on their circumstances and matters.