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To EOT, or not to EOT . . . ?

Writer's picture: KeySMEKeySME

Updated: Mar 4, 2022


Despite being introduced as part of the Finance Act 2014, the Employee Ownership Trust (EOT) is still a relatively alien concept to the business world. However, offering significant tax incentives and a swift exit route, the EOT model could present a practical alternative for any business owner considering a future disposal or exit.


Accordingly, in our latest #Insights feature, we take a good look at this alternative ownership model, highlighting the key benefits and considerations of a typical EOT structure. So, without further ado . . .


What is an Employee Ownership Trust?


EOTs are a form of Employee Benefit Trust (EBT), introduced as a government initiative in 2014. The model aims to promote employee ownership by giving business owners the opportunity to sell their shares to an EOT free from capital gains tax (CGT) and inheritance tax (IHT).


EOTs do not involve direct share ownership by employees. Instead, a controlling interest in the company is transferred to a trust which is held on behalf of the company employees. When establishing the trust, careful thought should be given to potential trustees. These could be existing directors, an independent professional, a corporate body or an Employee Council (a representative body elected from the beneficiaries).


As of Jan 2021, 55% of EOTs owned the entire share capital of a company with a further 40% structured in a 'hybrid' model - Where the EOT sits as majority shareholder alongside the original founders/shareholders with a retained percentage.


When setting up an EOT, funding will be required to facilitate the share purchase from the existing owners. This can be achieved through future income generated by the company or with the support of third party debt funding. For the latter, early engagement with a commercial finance advisor such as KeySME will be crucial to ensure the EOT secures a competitive and appropriate funding solution.


A viable alternative for business succession planning, an EOT can also be useful for business owners looking to restructure or scale-up their operations - Companies that have utilised the EOT model to support a range of business strategies include Richer Sounds, Aardman Animations and Riverford Foods.


OK, so what are the benefits of an EOT?


Firstly, significant tax incentives for owners, employees and companies:

  • Owners - Disposals into the trust can be made free from CGT and IHT.

  • Employees - An EOT can pay annual bonuses of up to £3,600 free of income tax.

  • Company - A corporation tax deduction for the value of these bonuses could then be available.

Further, an EOT could facilitate an exit where no obvious trade sale, MBO or third party purchaser is apparent, providing a quick and streamlined exit route for shareholders.


For owners looking to remain involved in a business, retained shareholdings up to 49% are permitted with an EOT the majority shareholder at 51%.


An employee-ownership model may also improve employee retention, morale and engagement as the goals of shareholders and employees become better aligned.


However, an EOT isn't right for all businesses. There are several potential drawbacks to consider including indirect ownership structure, meaning the company would not have full control. Also, determining the value of a business can be tricky and depending on how an EOT is to be funded, shareholders may not receive their money straightaway - The payout plan could stretch over several years if linked to future business income.


This sounds very interesting. What should I do next?


Engaging with a professional advisor would be a prudent first step. There are a number of specialist 'EOT' firms in the market alongside established accountancy practices with dedicated EOT teams. Amongst many things, a professional advisor can:

  • Conduct a strategic review to ensure an EOT is the right solution for your business goals

  • Design an appropriate structure to ensure beneficial tax treatment is achieved

  • Generate a robust and fair company valuation

  • Lead employee communications so you can rest assured your employees understand and appreciate the benefits of the EOT model

  • Provide legal assistance and prepare the necessary share transfer and trust documentation

  • Provide assistance in obtaining HMRC clearance and negotiating accordingly

If you're keen to take the next step, we can introduce you to a trusted advisor within our network of partners, so please don't hesitate to get in touch with the team at KeySME - We're here to help!


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KeySME Business Finance Limited, Glenside, The Coppice, Poynton, Cheshire, SK12 1SR is authorised and regulated by the Financial Conduct Authority (FCA) FRN 823899. KeySME Business Finance Limited is a credit broker not a lender. We work with a panel of lenders who will pay us a commission. This amount varies between lenders. KeySME Business Finance Limited is registered in England & Wales under Company Number 11357471. KeySME Business Finance Limited is ICO registered under ZA839156.

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