Business owners are now increasingly considering employee ownership when succession planning. Introduced in 2014, Employee Ownership Trusts (EOTs) are a government initiative aimed at promoting employee ownership by giving business owners the opportunity to sell their shares to an employee-owned trust.

A trust will essentially own a controlling stake in a company which is held for the benefit of the company’s employees. This article explores the benefits of using EOTs for business owners looking to sell their shares.

Tax saving benefits: Provided that certain qualifying conditions are met, shareholders who dispose of their shares to an EOT can claim a full UK capital gains tax exemption on the disposal. There are also certain income tax and inheritance tax reliefs available on the disposal.

Continuing involvement: Whilst the trust needs to hold the majority of the shares in a company, business owners can retain a minority interest (up to 49% of the share capital) in the company if they wish to have a continued involvement in the company. Often selling owners retain a role in the business either via directorships or consultant positions. The EOT model therefore allows for a gradual change in ownership and leadership if required, without having to involve any external parties. This can result in a smooth transition with an outgoing shareholder’s experience and expertise still at hand to the business.

Company ethos will continue: For shareholders who have founded and built up a successful business, it can be difficult to contemplate their company being in the hands of a third-party buyer. With EOTs, the change of ownership will unlikely have a major impact on the culture and ethos of the company; with the business activities of the company being carried on by management and staff. This will particularly be the case where the selling shareholders have a retained involvement with the company.

Employee incentive: By providing employees with a stake in the company they work for, it will likely improve employee engagement and motivate employees to grow the company. This in turn will generate success for the business through increased productivity and innovation.

Limited market: EOTs are particularly useful where the company is in a niche market with a limited number of potential purchasers.

If you would like further information about the above or a related matter, get in touch with Emily Shingler via email at [email protected], or call on 029 2082 9102 for a free, no obligation, conversation.