Jan 10•Written By Heaton Vences

What is an Employee Ownership Trust?

As a small business owner, you may often think about the future of your company. What will happen when you decide to retire, or if you wish to step back from day-to-day operations? One increasingly popular solution is transitioning to an Employee Ownership Trust (EOT). But what exactly is an EOT, and why should it matter to your business? Let’s break it down.

Understanding Employee Ownership Trusts 

An Employee Ownership Trust is a structure designed to enable employees to collectively own a company. Unlike direct share ownership, an EOT involves the creation of a trust that holds a controlling interest in the business on behalf of its employees.

This structure was introduced in the UK in 2014 to encourage employee ownership and provides significant tax advantages for business owners and employees alike. The trust ensures that the business’s future benefits the employees, fostering loyalty and engagement.

Key Features of an EOT:   

  1. Collective Ownership: Employees own the business collectively through the trust, rather than holding individual shares.
  2. Tax Incentives: Selling a controlling interest (51% or more) to an EOT is capital gains tax (CGT) exempt in the UK. Additionally, employees can receive tax-free bonuses up to a specified annual limit.
  3. Retention and Engagement: Employees are more likely to stay with and commit to a company when they have a vested interest in its success.

Benefits of an EOT for Small Business Owners

  1. Smooth Succession Planning

Transitioning ownership to an EOT allows you to exit your business gradually and on your terms. You can secure your legacy, ensuring the company continues to operate successfully under the stewardship of those who know it best – your employees.

  1. Financial Rewards

Selling to an EOT allows you to realise the value of your business while enjoying tax advantages, including the potential for CGT relief.

  1. Protecting Company Culture

Unlike selling to a third party, transitioning to an EOT ensures the company’s ethos and values remain intact. Employees who have helped build the company can continue to shape its future.

  1. Increased Employee Motivation

When employees have a stake in the company’s success, they are more motivated to perform at their best. This can lead to higher productivity and innovation.

Is an EOT Right for Your Business?

While an EOT offers numerous benefits, it’s essential to assess whether it aligns with your business goals and circumstances. Factors to consider include:

  • Profitability: The company must generate sufficient profits to fund the purchase of the shares over time.
  • Employee Engagement: A successful EOT requires employees to be committed to the company’s success.
  • Governance Structure: The trust will need a governance framework to oversee operations and uphold employees’ interests.

How to Transition to an EOT

The process of setting up an Employee Ownership Trust typically involves:

  1. Valuing the Business: An independent valuation determines the fair market value of your company.
  2. Creating the Trust: Establishing the legal trust structure and appointing trustees.
  3. Financing the Purchase: The trust may secure external financing or use company profits over time to buy the owner’s shares.
  4. Communicating with Employees: Transparency is key to ensuring employees understand and embrace their new roles as co-owners.

Re-cap

An Employee Ownership Trust (EOT) offers a compelling option for small business owners seeking a smooth transition of ownership. Here are the key points to remember:

  • Collective Ownership: Employees collectively own the company, ensuring its future benefits the workforce.
  • Tax Advantages: Enjoy significant tax reliefs, including capital gains tax exemption.
  • Cultural Preservation: Retain the company’s values and ethos by avoiding third-party sales.
  • Employee Motivation: Foster a motivated and engaged workforce with a vested interest in success.

With the right planning and guidance, transitioning to an EOT can secure your business legacy, reward your employees, and ensure long-term success. If you’re considering this option, Heaton Vences is here to guide you every step of the way.

Get in Touch with Heaton Vences

At Heaton Vences, we specialise in helping small business owners like you navigate the transition to employee ownership. Whether you’re exploring an EOT or looking for tailored advice on succession planning, we’re here to help.

Ready to Take the Next Step?

Book a meeting with us today and learn how an Employee Ownership Trust can secure your company’s legacy while rewarding your employees.

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