Exiting your business in a way that secures your legacy can be complex – but an Employee Ownership Trust (EOT) could be the answer.
Business owners are increasingly looking to reward and retain the staff that have been so crucial to the business’s growth and success.
Business sales can be an exciting experience, but they are also often daunting and fraught with legal intricacies that can derail even the most straightforward deals.
Seeking legal advice is essential if you are considering Employee Ownership for your business.
Employee Ownership Trusts (EOTs)
Employee Ownership provides a tax-efficient way for business owners to sell their companies to their employees. EOTs are becoming an increasingly popular exit strategy for business owners who wish to preserve the legacy of their business and reward their hardworking staff.
In an EOT, a majority stake in the company is sold to a trust, which holds the shares on behalf of the employees. The business owner receives full (but no greater-than) market value for their shares.
Legal teams can help with the transition of existing employees to new ownership. This can be achieved via Transfer of Undertakings Protection of Employment (TUPE), which is used to protect employees’ rights when a business is sold to a new buyer.
Benefits of Employee Ownership Trusts
One of the key benefits of an EOT is that it can provide a smooth transition and ensure business continuity. As the employees become indirect owners of the business, they are likely to be highly motivated to ensure its success.
Furthermore, EOTs can be used to provide Income Tax-free bonuses to employees, up to a cap of £3,600 per employee per year. Recent changes also allow directors to be excluded from eligibility for these bonuses, providing greater flexibility in structuring rewards.
Additionally, the sale of a business to an EOT is also entirely exempt from Capital Gains Tax, making it a very tax-efficient exit strategy.
However, CGT relief is only possible on compliance with trustee independence (newly introduced in the Autumn Budget 2024), wherein former owners or connected persons cannot retain control of the company through the trust deed for a period of four tax years.
Things to consider
Setting up an EOT requires significant planning.
The company must be able to demonstrate that an EOT is controlled for the benefit of all employees and that no individual can extract value from the trust to the exclusion of others.
The business also needs to be financially stable and profitable enough to buy out the owner’s shares over time, and trustees must be UK-resident to comply with new legislative requirements.
It is also important to note that it is difficult to reverse an EOT once established.
You should also be aware of the extended clawback period introduced in 2024, which allows CGT relief to be reclaimed if EOT conditions are breached within four years following the sale.
Therefore, it is essential to consider your long-term plans and seek expert legal advice before proceeding with this exit strategy.
Advice
Overall, while EOTs may not be suitable for every business, they can provide a viable and tax-efficient exit strategy for business owners who wish to reward their employees and secure the future of their business. EOTs can boost employee engagement and performance by integrating their success with that of the company.
However, it is crucial to consider the legal and tax implications for yourself, your employees, and your business.
At Hethertons Solicitors, we believe it is never too early to involve professional advisors in your exit strategy planning.
Our experienced corporate and commercial solicitors are on hand to discuss your options and support you through the whole process of selling your business, leaving you confident that your legacy is in safe hands.
If you are considering an Employee Ownership Trust for your business, contact us today for expert legal advice.