Employee Ownership Trusts (EOTs)
EOT were promoted by the government to promote employee ownership by giving business owners the opportunity to avoid capital gains tax from selling their shares to an employee-owned trust. EOTs do not involve direct share ownership by employees, rather a controlling interest in company is transferred to an all-employee trust which is then held for the benefit of employees
It enables a company to become owned by its employees, set up for the benefit of all employees by owners; the trust becomes a majority owner of the business as part of succession planning strategy. Because an EOT is a trust for the benefit of all employees, the employees will not directly own the shares in their company; they are beneficiaries of the trust which owns a controlling share. An Employee Ownership Trust is a type of indirect employee ownership.
Benefits in the short term allows owners an exit where there are no obvious third-party purchasers, and this can provide a quick and streamlined exit route for shareholders that allows tax free disposal by UK shareholders. The owners are permitted to retain up to 49% involvement with the remaining capital still available to incentivise management and key employees.
Benefits in the long-term help aligning goals of stakeholders and employees with improved employee retention and morale. Helping encouraging innovation at all levels, it Improves business performance by driving growth of stakeholder values. Employee ownership encourages employee engagement.
John Lewis was a pioneer in this sphere and the UK government introduced Employee Ownership Trusts in 2014 as their long-term goal was to encourage more businesses to move to an employee ownership model.
In simple terms, the John Lewis model gives every employee a stake in the company – this means each employee is part-owner of the business. John Lewis employees get a share of the group’s annual profits, as well as a say in how the company is run. Profit share is a major factor in improving productivity, as employees are given a tangible incentive to excel and help the company thrive.
According to the UK Government, research has suggested that employee-owned companies are run appropriately, benefit their employees, the business, and the economy itself. Employee-ownership encourages greater commitment and engagement in the company while reducing absenteeism, staff turnover, and even the number of accidents in the workplace. It stimulates productivity and profitability compared to similar non-employee-owned businesses. It helps businesses become more resilient through times of economic hardship due to less variability over economic cycles. It encourages faster growth in sales and employment.
The Government greatly supports employee-ownership, which is why they offer very generous tax incentives for business owners who sell their controlling stake to an Employee Ownership Trust. Some specific tax benefits are:
- Owner: Disposals into the trust can be made free from capital gains tax and inheritance tax.
- Employee: EOT can pay annual bonuses of up to £3,600 to employees free of income tax.
- Company: Corporation tax deduction for the value of the bonus available to the company.
Employee-ownership suggests the most substantial benefits of moving to employee-ownership are enjoyed by the employees, not the existing owners. This is not the case – there are some major benefits for existing business owners who dispose of a controlling stake in the company to an Employee Ownership Trust, such as, being guaranteed the full market value of shares and the sale of shares is effectively exempt from capital gains tax. While no IHT liabilities arise on the transfer to the EOT, they can recognise the contributions employees have made and reward them appropriately.
Employee-owned companies are a rapidly growing sector of the economy, with the top 50 employee-owned companies in the UK generating more than £20bn in combined sales in 2020. This is a 4.3% increase from 2019. Other companies that are owned by their employees include Richer Sounds, Aardman Animations, Weir Group, Mott MacDonald and Arup.
To explore options on how EOT can help your company, get in touch today with WIM Accountants.