Is an Employee Ownership Trust right for you?

The webinar provided insights into the motivations, benefits, and potential pitfalls of transitioning to an EOT structure. The panel emphasised the need for thorough planning and modelling to ensure that the financial aspects of the transition are viable.

Kirsty Leighton, founder and CEO of Milk & Honey shared her motivations for making the move, including empowering employees to become more commercially aware and to foster an environment open to new ideas, supporting business growth.

The panel also discussed:

• the legal structure of an EOT;
• the process of selling shares to an EOT;
• the tax benefits associated with selling to an EOT;
• deciding if an EOT is for you.

Key takeaways from the session:

• An EOT involves creating a new trustee company that acquires a majority shareholding in the trading business. Although not direct shareholders, employees gain a beneficial interest in the company’s value through the trust which holds the majority of the shares, allowing them to share in the company’s success as effective co-owners.
• Implementing an EOT requires extensive legal work, including bespoke articles of association for both the trust and trading company, potentially a shareholders’ agreement if original owners retain shares, and careful handling of complexities like bank debt.
• The directors of the trustee company have a fiduciary duty to act in the best interests of the employee beneficiaries, focusing on the long-term sustainability and success of the business.
• Funding for EOTs is gaining traction among funders, but some banks remain cautious.  EOT directors also need to consider the additional reporting requirements and costs of taking on the bank debt.
• Exiting employees can’t sell their beneficial interest upon leaving and cease to have an interest at that point (subject to limited exceptions). Continuing employees must wait for a specific event (like a company sale) to receive a financial windfall, but can receive tax free bonuses and other distributions in the meantime.
• When a business is initially sold to an EOT, the vendor shareholders benefit from 0% capital gains tax which essentially defers their gain to the EOT.
  • When the EOT subsequently disposes of the shares it holds in the business, it will realise a capital gain which will include the gain deferred by the original vendor shareholders.
  • If a subsequent sale, or other disqualifying event takes place within four tax years of the initial EOT sale the deferred capital gain would become chargeable back on the vendor shareholders and the 0% capital gains tax benefit would be lost.
• It’s important to understand and articulate your ‘why’ for wanting to transition to an EOT. If your motivation is solely financial, perhaps reconsider your approach.
• Founders should ensure that pursuing an EOT aligns with their individual aspirations and circumstances, as these can vary significantly. Founders should consider the timeline for receiving proceeds from the sale and how the value of their shares compares to other potential exit routes.
• Professional valuations are essential to access the capital gains tax benefits. HMRC will want to see that the valuation is reasonable and fair. Opting for the highest possible number without being able to show the workings out could backfire.
• Fostering a collaborative environment where team members feel involved and valued is key to the success of an EOT, in turn enhancing morale, productivity and employee engagement.