What is an Employee Ownership Trust (EOT)?
An Employee Ownership Trust (EOT) is a legal mechanism that allows a company to be owned by a trust on behalf of its employees. It offers an alternative to traditional business sales, enabling owners to pass control to their workforce while preserving the company’s culture and values.
Introduced by the UK government in 2014, EOTs are designed to encourage employee ownership and offer significant tax incentives to business owners who choose this route.
Why choose an EOT?
Selling to an EOT can be an attractive option for business owners looking for a succession plan that benefits both themselves and their employees.
Key advantages include:
- Capital Gains Tax relief: If the sale meets qualifying conditions, business owners may pay no Capital Gains Tax on the disposal of their shares.
- Simplified sale process: Compared to third-party sales, EOT transactions often involve fewer negotiations and less due diligence.
- Employee engagement: Ownership can boost morale, productivity, and retention by giving employees a stake in the company’s success.
- Tax-free bonuses: Employees can receive annual bonuses of up to £3,600 free of income tax.
- Preserving legacy: Selling to employees helps maintain the company’s ethos, brand, and long-term vision.
Key considerations before selling to an EOT
While EOTs offer many benefits, there are important factors to consider:
- Deferred payment structure: EOTs typically pay the full purchase price over a longer period than would be the case in a typical management buy-out. Payments are usually made over time, funded by the company’s post-completion profits.
- Strong leadership required: A capable and trusted management team must be in place to ensure the business continues to perform and meet its financial obligations.
- Control must transfer: The sellers must not retain control of the company, although they may retain a minority stake and enjoy certain value protections.
- Risk of underperformance: If the business does not generate sufficient profits post-sale, the seller may not receive the full value of the transaction.
- Valuation and funding: The company must be independently valued, and funding arrangements must be carefully structured to ensure sustainability.
Legal and regulatory requirements
To qualify for the tax benefits associated with EOTs, the transaction must meet specific statutory criteria, including:
- The trust must hold a controlling interest in the company.
- The company must be trading and not be part of a larger group.
- The trust must generally operate for the benefit of all eligible employees on equal terms.
Legal and financial advice is essential to ensure compliance and to structure the transaction in a way that meets both the seller’s and the company’s needs.
How our corporate solicitors can help
Clarke Willmott’s corporate solicitors offer end-to-end support for businesses considering an EOT. Our services include:
- Feasibility assessment: We help you determine whether an EOT is the right fit for your business.
- Transaction structuring: We design a deal that aligns with your financial goals and meets legal requirements.
- Legal documentation: We draft and review trust deeds, share purchase agreements, and governance frameworks.
- Stakeholder coordination: We work closely with accountants, valuers, and internal teams to ensure a smooth process.
- Post-transaction support: We advise on trust governance, employee communications, and ongoing compliance.
Our team combines technical expertise with a practical understanding of business dynamics, ensuring your transition is both legally sound and strategically beneficial.
Who we can help and how
We work with a wide range of businesses considering employee ownership, including:
- Family-owned businesses: EOTs offer a way to preserve legacy and values while rewarding loyal employees. They can be especially effective when there is no clear successor within the family.
- Professional services firms: Including law firms, accountancy practices, and consultancies – EOTs can provide a structured way to transition ownership while maintaining client relationships and firm culture.
- SMEs Across all Sectors: Whether in manufacturing, technology, or retail, EOTs can be tailored to suit the unique needs of most small and medium-sized enterprises as well as larger organisations.
Our approach is collaborative and bespoke. We take the time to understand your business, your people, and your goals – then guide you through every step of the EOT journey.
Get in touch
Contact us today to explore how an Employee Ownership Trust could work for your business and help you build a legacy of shared success.
Our specialist corporate solicitors based in Birmingham, Bristol, Cardiff, London, Manchester, Southampton and Taunton provide legal advice to both UK and international businesses.
Call for a free initial consultation today on 0800 652 8025 or get in touch online.
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