Understanding the EOT Structure

An Employee Ownership Trust (EOT) is a UK government-endorsed model that enables business owners to transfer a controlling interest in their company to a trust established for the benefit of all employees. This structure offers a tax-efficient succession plan while fostering a culture of shared ownership and engagement.

What Is an EOT?

An EOT is a trust that holds a controlling stake (more than 50%) in a company on behalf of its employees. Unlike direct share ownership, employees benefit indirectly through the trust, which operates in their collective interest. The EOT model was introduced in the UK under the Finance Act 2014 to promote wider employee ownership.

How Does an EOT Work?

1. Establishment of the Trust: The current owners set up an EOT, typically with a corporate trustee structure.

2. Share Sale: The owners sell a controlling interest in the company to the EOT at market value, as determined by an independent valuation.

3. Financing the Purchase: The purchase is often financed through the company's future profits, allowing the EOT to pay the owners over time.

4. Governance: Trustees oversee the EOT, ensuring the company is run for the benefit of all employees. However, day-to-day operations remain under the company's management team.

   
   

Benefits of an EOT Structure

• Tax Advantages: Owners can sell their shares to an EOT without incurring Capital Gains Tax (CGT), provided certain conditions are met.

• Employee Incentives: Companies owned by an EOT can pay annual bonuses to employees of up to £3,600 free of income tax.

• Succession Planning: EOTs offer a viable exit strategy for owners, ensuring business continuity and preserving the company's legacy.

• Enhanced Employee Engagement: Employee ownership can lead to increased motivation, retention, and a stronger commitment to the company's success.

  
  

Considerations for Implementing an EOT

• Eligibility: The company must be a trading entity, and the EOT must acquire a controlling interest.

• Equality Requirement: All employees must benefit from the EOT on the same terms, with distributions varying only by factors like salary or length of service.

• Trustee Composition: Best practices suggest a mix of employee representatives, independent trustees, and possibly company directors to ensure balanced governance.

• Financial Viability: The company's profitability should support the EOT's obligations to pay former owners and provide employee benefits.

Transitioning to an EOT structure can be a strategic move for business owners seeking a tax-efficient succession plan that rewards employees and secures the company's future. By understanding the EOT framework and its implications, owners can make informed decisions that align with their legacy and business objectives.

Considering an EOT for your business? Contact Us to explore how we can assist you in navigating the transition to employee ownership.