Employee Ownership Trust Funding

An Employee Ownership Trust (EOT) enables exiting owners to transition ownership of a business to their employees, leaving it in experienced hands while also rewarding and motivating the employees who become co-owners. 

Eligible employees will indirectly own the business, and will collectively be beneficiaries of the trust, receiving financial benefits that would typically be given to shareholders. 

The exiting owners can remain involved with the business (continuing to own up to 49% of the share capital), enabling them to help plan for the future without making any immediate or dramatic changes in management. 

Since their introduction by the government in September 2014, EOTs have become an increasingly popular option for exiting owners given the wide range of benefits these can provide to the business, the exiting owner and the employees also. 

EOT buy-outs are often funded through deferred consideration based on future profitability. This means that shares are sold by the shareholders on a deferred payment basis, with instalments being paid over a period of time. By using external finance, it is possible to speed up access to these funds for the selling shareholders and therefore fast-track the EOT process.

This method provides sellers with expedited access to capital, thereby facilitating a smoother and more rapid transition, while ensuring business operations remain uninterrupted.

Employee Ownership Trusts offer numerous advantages for both business owners and employees: 

• Enable eligible employees to indirectly hold shares in the company whilst providing tax benefits and assisting with succession planning for business owners 
• Greater employee engagement and commitment 
• Directors can remain in the business, receiving market competitive remuneration post-sale 
• Potential for improved business performance and reduced staff absenteeism 
• Tax (capital gains tax) relief for sellers with no inheritance tax liabilities 
• Original shareholders can retain an interest in the business with only a majority stake transferred to EOT, maintaining a level of influence and connection 
• Tax-free bonuses (up to £3.6k p.a.) allowed for employees 

An Employee Ownership Trust (EOT) is typically funded using a combination of company profits, EOT finance from a bank, and sometimes small contributions from employees. The trust raises the funds to buy shares from the existing owners, and the company can repay the loan over time from profits. This structured approach lets employees become owners through the EOT without creating financial strain. 

• The EOT must acquire and retain a controlling shareholding in the company (i.e. more than 50%). 
• The company must be a trading company or the holding company of a trading group. 
• The EOT must be set up for the benefit of all eligible employees on the same terms. 
• The number of people who are directors or employees, and who continue to hold at least 5% of the company’s shares after the transition, must not exceed 40% of the total number of employees. 

An Employee Ownership Trust (EOT) legally owns the company’s shares on behalf of the employees. The trust itself is a separate legal entity, and the employees are the beneficiaries, meaning they enjoy the financial and governance benefits of ownership. The trust is managed by appointed trustees, who make decisions in the employees’ best interests, but the employees collectively benefit from the ownership through the EOT. 

The board of trustees for an EOT typically consists of employee trustees, vendor trustees, and independent trustees.   

• Employee trustees represent the workforce, ensuring their interests are considered.   
• Vendor trustees are often former owners or sellers who bring historical knowledge and continuity.  
• Independent trustees offer unbiased expertise and oversight.   

Together, they collaborate to fulfil trustee responsibilities, such as managing trust assets, ensuring compliance, and making decisions that benefit the company and its employees. 

No, selling your business to an EOT does not mean you are passing direct control to the employees. Control is transferred to the appointed trustees, who manage the trust on behalf of the employees. While employees indirectly benefit from ownership, the trustees are responsible for making key decisions in the best interests of both the business and its workforce. This ensures professional and balanced governance. 

An EOT offers several tax advantages, including:  

1. Sellers may be eligible for Capital Gains Tax relief, subject to meeting relevant criteria.   
2. Employees may be eligible for tax-free bonuses (subject to applicable limits and legislation).   
3. Companies can deduct contributions made to the EOT from their taxable income, thereby improving tax efficiency.   

These benefits make EOTs a compelling option for businesses looking to transition ownership in a cost-effective manner.    

Please note, Shawbrook are not advisors. Therefore, anyone seeking to transition to an EOT should seek appropriate guidance.