Employee Ownership Trusts

An EOT gives employees a real stake in the business, helping to drive engagement, reward loyalty, and secure the company’s future.

The basic mechanics of an EOT involve the establishment of the trust, securing funding, and the sale of shares to the EOT. The trust then holds the shares on behalf of the employees, who benefit from the ownership structure.

The EOT is managed by a board of trustees, which typically includes:

• An employee trustee (they must be nominated)
• A professional trustee
• An ex-shareholder/Seller (note under the changes introduced at the Autumn Budget 2024, they cannot control the trust)

Typically, a private company limited by guarantee is used as a corporate trustee to protect directors from personal liability. The board of directors of the trustee company should include employees and an independent director to provide support and ensure good governance.

Key Benefits of an Employee Ownership Trust

Choosing an Employee Ownership Trust (EOT) structure offers a wide range of advantages, for both employees and business owners. Some of the key benefits include:

• Employee engagement and motivation: Employees have a real stake and say in how the company is run, which often leads to higher morale and stronger performance.
• Increased staff retention: Businesses owned by employees typically experience lower staff turnover rates.
• Attraction of new talent: Offering employee ownership is a compelling selling point for job seekers.
• Preservation of company culture: The exiting shareholder can retain up to 49% ownership, helping ensure the company’s values and ethos remain intact.
• Minimal disruption to operations: Ownership transition through an EOT is typically smoother and less disruptive compared to trade sales or private equity deals.

Attractive tax benefits

EOTs offer significant tax advantages for both employers and employees:

• Capital Gains Tax (CGT) Relief: Where a sale to an EOT qualifies, 50% of the gain is treated as chargeable. This is a change from the previous tax treatment, prior to November 2025, when sales to an EOT resulted in 0% capital gains tax. This means that for most sales to an EOT, the effective tax rate will now be 12%.
• No Inheritance Tax (IHT) charges: Transfers of shares to an EOT are free from IHT, provided the individual making the transfer was beneficially entitled to the shares.
• Exemption from ongoing trust charges: Unlike other trusts, EOTs are not subject to the standard 10-year anniversary or exit charges for inheritance tax purposes.
• Tax-free employee bonuses: Companies owned by an EOT can pay employees income tax-free bonuses of up to £3,600 per employee, per year. (Note: National Insurance contributions still apply, and the bonus must not replace regular salary.)
• Corporation Tax deduction: These employee bonuses are fully deductible for Corporation Tax purposes, providing further savings for the business.

What are the requirements to qualify as an Employee Ownership Trust?

For a trust to qualify as an EOT, all the following conditions must be met:

The Trading Requirement

The company must be a trading company, or if it is within a group structure, the company must be the principal company within a trading group.

The All-Employee Benefit Requirement

Benefits must be distributed equally among all eligible employees, though factors like salary and length of service can be considered.

The Controlling Interest Requirement

The trustees must possess:

• More than 50% of the ordinary share capital of the target company.
• More than 50% of the voting rights.
• Entitlement to more than 50% of the profits available for distribution to the equity holders by the company.
• More than 50% of the available assets in the case of a winding-up of the company.
• Moreover, there can be no existing provision such that the trustee’s above position can be revoked without the trustee’s consent.

The Limited Participation Requirement

This condition is met if the number of people who are 5% shareholders, officers or employees of the company (plus employees/office holders connected with these people), does not exceed 40% of the total employees of the company.

Trustees Independence Requirements (effective from 30 October 2024)

First, the trustees should be UK resident (as a body) at the time of disposal.
Moreover, not more than 50% of the trustees should be “excluded participators”.

Excluded participators is generally defined as:

• Someone who owns or is entitled to own more than 5% of the company.
• Any participator in a close company making a disposition into the same EOT.
• Anyone connected with the above.

Excluded participators should not have control of the settlement.

Market Value Condition (effective from 30 October 2024)

Reasonable steps should be taken to ensure that the consideration paid for the shares does not exceed market value.

Why Stratos?

Establishing an Employee Ownership Trust (EOT) involves complex qualifying requirements, making expert tax advice essential. At Stratos, we understand the bespoke nature of these requirements and offer tailored support across every stage of the process, including:

• Designing your EOT structure to suit your specific needs while maximising available tax benefits.
• Implementing your EOT in a compliant and efficient manner.
• Providing ongoing communication and advice regarding HMRC reliefs and compliance obligations.Working with your legal team to ensure that the transaction completes efficiently.

With Stratos, you have a trusted partner to guide you through the implementation of your EOT with clarity and confidence.