An Employee Ownership Trust, or EOT, can provide a practical succession route for business owners who want to preserve the company’s culture, reward employees and secure the long-term future of the business.
Stratos advises owner-managed businesses, shareholders and professional advisers on the tax aspects of EOT transactions, including relief conditions, sale structure, funding, valuations, employee benefit requirements and ongoing compliance.
An Employee Ownership Trust is a trust that acquires and holds a controlling interest in a trading company for the benefit of the company’s employees. For business owners, an EOT can provide an alternative to a third-party sale, management buyout or family succession.
Why business owners consider an EOT
- The owners want to step back or exit.
- There is no suitable third-party buyer.
- The owners want to protect the company’s culture and continuity.
- A management buyout is not practical.
- The business has a strong employee base.
- Succession planning is becoming urgent.
- The business can fund the transaction over time from future profits.
Tax relief and EOT conditions
EOT transactions can provide valuable tax relief for qualifying disposals, but the rules are detailed and the conditions must be met at completion and for a period of time after completion. The rules have changed over time, so current advice is essential before presenting the tax outcome to shareholders or employees.
How does an EOT buy the business?
In many EOT transactions, the trust acquires the shares from the existing owners and pays the purchase price over time from future company profits. The valuation, funding plan, governance arrangements and payment profile all need careful consideration.
When pre-sale restructuring may be needed
Some companies need restructuring before an EOT sale. For example, a trading company may hold investment assets, surplus cash, property or other assets that are not suitable for the EOT structure. In those cases, a pre-sale reorganisation or demerger may be needed before the EOT transaction. This is something which we can assist with implementing if required.
How can Stratos help you?
Stratos can help assess whether an EOT is suitable, review the tax conditions and coordinate with legal, valuation and corporate finance advisers before the transaction proceeds.
Our expertise lie in:
- Assessing whether an EOT is commercially and tax appropriate.
- Reviewing qualifying conditions and shareholder tax treatment.
- Considering pre-sale restructuring or demerger requirements.
- Supporting valuation and funding discussions.
- Working alongside your legal team on implementation.
- Reviewing employee benefit and bonus arrangements.
- Comparing an EOT with other exit and succession options.
- Advising on ongoing tax compliance after completion.
Explore whether an EOT is the right succession route
If you are considering an Employee Ownership Trust, take advice early. The structure, conditions and commercial plan should be reviewed before terms are agreed or employees are briefed.
Contact Stratos to discuss whether an EOT could support your exit and succession objectives.
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Case Study
Future-Proofing the Business: Succession Planning via an Employee Ownership Trust
The Challenge
Our clients, a husband-and-wife team, owned a highly successful retail business that also included valuable property assets. As they approached retirement, they wanted to secure the future of the business while rewarding their loyal employees. They were looking for a solution that would ensure the company’s continued success without a full sale to outside parties.
The challenge was further complicated by the property assets, which needed to be separated from the operational side of the business. This separation had to be handled effectively before moving forward with an EOT to ensure tax efficiency and preserve the company’s value.
The Solution
Stratos provided comprehensive support throughout the transition process, delivering a tailored strategy to meet the client’s needs:
- Demerger of Property Assets: We guided the clients through the demerger process, ensuring the property assets were legally and financially separated from the core business in a way that aligned with the EOT structure.
- Valuation of the Business: To ensure the sale was done at market value and therefore met the conditions for a sale to an EOT, we assisted in the valuation of the business, providing a fair and transparent assessment that satisfied both the clients and regulatory requirements.
- EOT Design and Implementation: We worked closely with the shareholders to design and implement the EOT to ensure it would meet the specific needs of the business and its employees. This included careful planning of the transaction process to ensure both the company and the employees could benefit from the tax efficacy of the EOT.
- Coordination with Lawyers: We supported the clients throughout the process by collaborating with their legal advisors to draft the necessary trust documents, ensuring smooth implementation and compliance with all legal requirements.
The Value
The transition to employee ownership was successfully completed, with the majority of the business — and its future — now owned by the employees. Key outcomes included:
- The property assets were separated effectively, ensuring tax efficiency and protecting the business’s operational side from unnecessary complexities.
- The husband-and-wife owners were able to exit with tax relief, with no capital gains tax on the sale under the EOT structure, allowing them to step back from the business, whilst retaining a small 20% shareholding so that they can continue to support the business as needed but are able to see the company thrive under employee ownership.
- The company maintained its culture and continued to grow with the dedication and motivation of the newly engaged employee-owners.
FAQs
An Employee Ownership Trust is a trust set up to acquire and hold a controlling stake in a business for the benefit of employees.
An EOT can support succession where the owner wants continuity, employee ownership and an alternative to a third-party sale.
Relief may be available where the conditions are met, but the rules are complicated and have changed over time. Current advice should be taken before relying on any assumed tax outcome.
Often, the EOT pays the exiting owner over time from future profits generated by the business, although the funding profile must be carefully reviewed.
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Related Services
Employee Ownership Trusts
Succession Planning
Restructuring & Demergers
Capital Gains Tax
