Employee Ownership Trusts

Geldards have an established track record advising owners and their companies on the transition to employee ownership via an Employee Ownership Trust (EOT). Our combination of Corporate and Tax expertise provides a seamless service when dealing with the technical requirements to qualify for the tax benefits of being employee-owned. We guide businesses through the process of becoming employee-owned and offer continued support afterward.

We can assist owners in considering whether employee ownership is the right way forward for the future of their company. We help to evaluate the competing requirements of protecting the business legacy, the future operation of the business and obtaining a fair price.

We have successfully advised over 20 companies on their transition to EOT ownership nationwide. We also advise companies that have made the transition to EOT ownership on any continuing issues that can arise after the transition. We can provide guidance on employee engagement during the transition and work with specialist advisers who can assist with improving employee engagement to ensure the continuing success of being employee-owned.

We also assist the EOT board and the management board in understanding their respective roles and setting terms of reference for each board. We can assist trustee directors in understanding their role and responsibility, particularly where the individuals have no experience of a director or trustee appointment.

We understand the pros and cons of employee ownership trusts from tax benefits, to employee share schemes, to payment plans and inaccurate valuations. We can also advise on issues such as acquiring employee-owned businesses and what to consider should you receive an offer for the company.

What is an employee ownership trust?

An EOT is a method of ensuring a company is owned for the benefit of and on behalf of its employees. The best-known example of employee ownership in the UK is the John Lewis Partnership. The current EOT model was introduced in 2014 and became increasingly popular in 2020.

How does an employee ownership trust work?

A trust, the EOT, is created by the parent company which buys the shares from the current shareholders, so the EOT owns the shares on behalf of the employees. With an EOT, the employees do not have a direct shareholding so there is no requirement to purchase shares from employees when they leave the company.

How is employee ownership trust funded?

The EOT is funded by a gift or contribution from the trading company. The contribution can be made from cash reserves to pay any initial consideration with deferred consideration being funded from future profits contributed to the EOT. The sellers will only get paid if the trading company continues to be successful.

How is employee ownership trust taxed?

The sellers will be able to claim relief from capital gains tax (CGT) on the sale of their shares to the EOT provided the qualifying conditions are satisfied at the time the EOT obtains control of the company and for a period of time after the sale. The EOT can be subject to CGT if the qualifying conditions fail to be satisfied.

Employees can receive a bonus from the EOT of up to £3,600 per year on an income-tax-free basis. The ability to pay the EOT bonus is wholly dependent on the success and profitability of the trading company. The EOT bonus will be subject to National Insurance Contributions.

The trading company will not be able to claim a deduction for corporation tax for the contributions made to the EOT.

How to set up an employee ownership trust?

The EOT is established by the trading company (or the holding company of a group). The EOT trustee will generally be a company limited by guarantee with a number of directors who make the decisions as the trust board. The EOT trustee can not be controlled by the sellersand must be located in the UK (For EOTs formed on or after 30 October 2024. It should also include some employees as members. An independent chair of the EOT board is recommended to ensure good governance and operation of the EOT board.

Why choose Geldards?

The EOT market is maturing in the UK as it is now 10 years since the current legislation was introduced and we have over 1,800 employee-owned businesses in the UK. Geldards has advised on the transition of over 20 companies to employee ownership. Geldards have also advised on transactions involving the sale of a business out of an EOT and have a thorough understanding of the complex issues that can arise, including trustee duties in considering a sale, the terms of the sale, the tax consequences and the division of any sale proceeds to the qualifying employees. Geldards can guide your business not just through the process of becoming employee-owned but also afterwards, maintaining consistent support. We also run regular roundtable events for directors and trustees to facilitate discussion and share best practice for employee-owned businesses.