The Government introduced Employee Ownership Trusts (EOTs) back in the 2014 Finance Act to encourage more shareholders to transfer shares to a corporate structure (like the John Lewis model) which offered indirect employees share ownership.
Since 2014, over 700 companies have transferred ownership into the hands of their staff, with increasing numbers of other organisations starting on the EOT route every day.
The big question is, why are there still so few? Bearing in mind, there are more than 4 million registered companies in the UK.
The benefits for both the vendors, who make this transfer and the staff who benefit are frankly exponential. For the vendor, all proceeds of the sale value are taken tax-free (yes, completely tax-free). And the employees within the business don’t pay personally for the shares but can take up to a £3,600 tax-free dividend each year.
Alongside tax advantages, another plus to an EOT is that the culture of the business is not affected in the same way as can occur with a trade sale, which can really challenge the status quo. The employees, aka the ‘new owners’ feel empowered and massively engaged as they are owners. An EOT can also help with employee attraction and retention, which is a huge gain in today’s ever-increasing challenging recruitment market. Plus, the PR value is enormous.
Another benefit is that the time it takes to carry out an EOT can be less than a third of the time to do a traditional trade sale.
Further, the Government is firmly supporting employee ownership, so whilst Capital Gains Tax may possibly be increased by the revenue, as much as we can ascertain for now at least EOTs will remain in their zero-tax heaven.
Throughout the pandemic, EOTs however gained considerable traction, likely due to the anticipated rise in UK Capital Gains Tax at the time.
There is rarely a day that goes by without reading about the latest EOT in the press. Virtually every type of business from professional services to manufacturers are jumping on this fantastic exit opportunity. What has brought this about is not totally clear but it’s likely a mixture of owners reflecting on their future and their succession and work-life balance through the lockdown. Many business owners have realised that without their team there isn’t a business and what would happen if employees left. In addition, a desire to repay back to the staff for creating such value in the company.
Alternatively, we would be happy to discuss the employee ownership trust process with you in a confidential manner and answer any questions you may have directly, please get in touch.