What is an Employee Ownership Trust?

Our director Jeremy Kitson looks into Employee Ownership Trusts (EOTs), an initiative aimed to promote employee ownership by giving business owners the opportunity to sell their shares to an employee-owned trust free from capital gains tax.

By Jeremy Kitson

How does an Employee Ownership Trust work?

Employee ownership trusts are funded via a simple process – shareholders sell their shares to the trustee company at full market value, and a minimum of 51 per cent must be sold. The sale creates a debt owed by the trustee company to the shareholders. The debt is repaid by the company generating trading profits each year and using this profit to make a contribution to the trustee company to repay the shareholders.

The advantages to the shareholders of selling to an EOT

A common question shareholders may ask is how is an employee ownership trust taxed. The good news is there is no capital gains tax, income tax or inheritance tax liability arising on the disposal for the shareholders.

There are several other benefits of shareholders selling to an EOT:

Employees can indirectly purchase the company without having to use any of their own funds or raising any finance
Shareholders sell for full market value
Not all shareholders have to sell their shares to the EOT
Leadership succession can be implemented over time

The advantages of an EOT for the company and employees

Staff can receive an employee ownership trust tax-free bonus of up to £3,600 per employee per year and share-based incentive awards.

Employee share ownership means employees have a stake in their company, promoting greater employee engagement and commitment and the ability to attract and retain key talent.

Which sectors are taking advantage of EOTs?

Research from the Employee Ownership Association shows five sectors which are top for employee-owned businesses:

Professional Services
Manufacturing
Construction
Wholesale and Retail Trade
Information and Communication

Generally, an EOT could be attractive in sectors where one of the main assets of the business is the employees. Employee ownership helps retain the best talent by giving them a stake in the business.

Growth in Employee Ownership Trusts

According to BDO, the total number of UK employee-owned (EO) businesses towards the end of 2023 is around 1,400, which represents an increase of around 40 per cent compared with 2022.

At Prime, we have seen a number of our clients sell their businesses to EOTs. This may be an option when considering your future exit or succession plans.

How to set up an Employee Ownership Trust

We hope you’ve found this summary of the key traits of an Employee Ownership Trust useful. There are complex rules and regulations governing an EOT, and you should seek professional advice if you are considering it for your company.