What Is An Employee Ownership Trust (EOT)?

An Employee Ownership Trust (EOT) is a specialised arrangement that allows a company’s employees to collectively own a stake in the business through a trust structure. This model provides employees with a share of the company’s profits and a voice in its operations, fostering a sense of ownership and alignment with the company’s success. 

By transferring shares to the trust, business owners can facilitate succession planning, enhance employee engagement, and potentially benefit from tax advantages. EOTs are increasingly recognised as a valuable tool for promoting long-term sustainability and shared prosperity within organisations.

How does an Employee Ownership Trust work?

An EOT operates by holding a significant portion, or even all, of a company’s shares on behalf of its employees. Here’s a step-by-step breakdown of how it works:

Establishing the trust

When a company sets up an Employee Ownership Trust, it does so by establishing its own dedicated legal entity to look after and hold shares in the name of the staff. There is an appointment of trustees who supervise the operation and ensure that it is being operated in a way which will benefit its employees. 

Trustees are the ones who must manage the trust to meet legal and corporate objectives. Trustees’ responsibilities include implementing the activities of the trust, such as the provision of benefits and adherence to legislation – in short, seeking to ensure that actions taken by a trust align with what is best for its workforce.

Share transfer

Under an EOT arrangement, the owner transfers shares to the trust. This transfer might take place in a conventional, straightforward purchase or as a gradual shift of shares over time. As such, the EOT becomes a shareholder where shares are held in the trust for the benefit of all employees. 

It allows the owner to relinquish control of day-to-day operations while employees receive interests in company ownership. Shares are held by an EOT, and the task of the EOT is to manage these shares in such a manner to benefit employees, giving them a financial stake with regard to the success of the company.

Financing

There are many ways an Employee Ownership Trust can help with the purchase of shares. This may include taking out loans from banks or other financial institutions to pay for the shares. In other cases, the company might backstop the EOT enabling repayments to be made from future profits or funding arrangements. 

The EOT will be able to acquire shares using financing options in a manner that immediately requires the company or trust (as applicable) to make full payment for those excess and surplus shares.

Employee benefits

An Employee Ownership Trust grants employees financial awards in relation to how the organisation performs. This includes such things as annual bonuses to employees and shareholders in the form of (for example) dividends or other financial benefits arising from an EOT distribution. 

In addition to the immediate financial rewards, this will also provide employees with increased job stability and more of a say in company operations. The structure of the EOT is to promote economic resilience so that employees see greater rewards when the company performs well, and they have an involvement in its future.

Governance and management

An Employee Ownership Trust does not involve the company; it only takes over shares of the company. The existing management still gets to manage daily operations in an EOT case as well. The trustees of the EOT ensure that the trust is run in a way that best serves its employees. 

The funds are responsible for overseeing the trust’s holdings and distributing its benefits, but they do not get involved in day-to-day decisions earmarked for supervisory boards. This separation allows the business to continue its operational independence but with enhanced employee alignment, as facilitated by the EOT.

Profit distribution

The Employee Ownership Trust receives a share of company profits for distribution to employees. The profits can be returned to the trust as bonuses or dividends or re-invested into the business to help employee-related ventures. This structure allows employee compensation to link up with company performance, fostering a culture of shared ownership and motivation.

Profit channelling through the EOT can, therefore, help increase employee satisfaction and engagement, bringing in a more productive workforce and ultimately increasing the positive effect of employee ownership.

Who manages the EOT?

The EOT is managed by a board of trustees appointed to run its affairs. The trustees are responsible for making sure that the trust behaves in a way consistent with both good governance of its employee’s financial obligations and legal requirements. They are responsible for controlling the EOT’s shares, managing how financial benefits are passed on and enabling strategic decisions about its operation. 

Trustees are individuals internal to the company, outsourced advisors or even a mix of both. While they will look after the affairs of the trust they are not responsible for running day-to-day company operations, which remain in the hands of existing management.

Tax implications of Employee Ownership Trusts

Employee ownership trusts provide some key tax benefits. Upon the sale of shares to an EOT, a business owner could be eligible for Capital Gains Tax (CGT) relief, which can lessen or completely reduce their tax bill from selling. The relief is intended to encourage business owners to sell to EOTs rather than external buyers. 

EOTs can also qualify for Corporation Tax relief on bonuses and other cash payments made to employees, increasing the financial gain for staff. Still, tax regulations are both complicated and ever-changing therefore tax professionals should be approached to advise you correctly on every aspect for ultimate benefits.

Examples of tax advantages

• Capital Gains Tax relief: Business owners may be able to claim full CGT relief when selling shares to an EOT, which could mean no tax on the sale. Compared to other scenarios, this is a huge selling point for retiring or passing on your business.
• Corporate Tax deduction on bonuses: The company may receive a Corporate Tax deduction in connection with bonuses and other monetary benefits paid to employees by the EOT. This is a way of reducing the company’s taxable profit and, hence, its tax bill.
• Inheritance Tax: EOTs help inheritance tax planning, as an EOT can reduce the value of the deceased owner’s estate on death because the owner has given away economic ownership to the company employees rather than their children individually.
• Tax-exempt employee benefits: Contributions to employees can be made via the EOT. For example, a bonus payment or another form of financial contribution is generally exempt from employee National Insurance, further reducing costs.
• Stamp duty avoidance: In some cases, transferring shares to an EOT may mitigate or eliminate any stamp duty charges that might otherwise be payable, considering the jurisdiction and nature of the transaction in question

The benefits of setting up an Employee Ownership Trust

There are several benefits of setting up an EOT. Below are the main ones you should consider:

Enhanced employee engagement

The Employee Ownership Trust, which typically sees employees holding a direct share of the success and benefits, increases their engagement. Employee ownership connects an employee to the success of a company and creates an emotional tie for that person. As such, employees become increasingly motivated by what happens within their company because it has personal meaning, which means they have added incentive in collaboratively working towards business objectives. 

This stronger ownership can lead to significantly increased job satisfaction, as employees will see their work output tied more directly to the overall company accomplishment. Higher levels of engagement generally indicate greater productivity, as employees are willing to go above and beyond for the company/organisation to achieve growth and sustainability.

Succession planning

Employee Ownership Trusts provide a framework and functional exit plan for business owners. Through an EOT, owners can pass on full control of ownership to a successor while retaining the operational continuity in the company. 

It ensures the culture and values of your company because you are passing on a full-service team offering better services than selling off to all outsider buyers. For owners seeking to transition out of the business over time or eventually retire and leave an EOT, it provides a clear exit which protects both their legacy as well as its future.

Improved job security

Employee Ownership Trusts make a big difference in terms of job security for employees. The idea is to align employees’ incentives with those that would benefit long-term owners and, as shareholders themselves (vesting over time), make their compensation more closely tied to share price performance. 

This alignment of incentives creates a more steady work factor in which employees are energised to produce the company’s success and income. When job security rises, turnover rates drop, thanks to employees having a stake in your company’s success. This provides stability for both the employees and the company, encouraging a committed workforce.

Fostering a collaborative culture

ith employees having a vested interest in the business, they will have more incentive to work together towards common goals and generate camaraderie amongst themselves. A common goal unites employees by building shared meaning, which can result in improved collaboration and communication. 

EOT governance can lead to broader participation in company decision-making, a sense of buy-in by employees into the firm’s success, and ultimately, collaboration as an accepted culture within companies. If an organisation can achieve this type of teamwork, it will fuel creativity and, far above all, improve the performance of a firm.

Who would an EOT work well for?

A good business succession plan, coupled with a method of engaging staff is found in an Employee Ownership Trust. It is best for businesses with a solid, engaged workforce that has an opportunity to align their own financial success alongside the company’s. EOTs work well for business owners who are transitioning out of the proprietorship yet want to leave a legacy and protect company culture. 

They are also appropriate for companies that want to offer shares of ownership among key employees, in order to boost morale and maximise productivity. Likewise, enterprises built on a long-term stable base that are looking for advantageous tax treatment upon an EOT sale also like this structure.

Get specialist guidance from Braant

Braant Accountants can greatly help in the creation and operation of an Employee Ownership Trust. We provide professional guidance for the establishment of an EOT, keeping in mind lawful and tax conformity. Braant advises on how to structure the trust, transfer privately listed shares and deal with finance options. We have the experience to deliver EOT in an appropriate manner, with all financial and operational benefits for business owners as well as employees. 

If you are interested in an EOT as part of succession planning or for improved employee engagement and productivity, let Braant provide professional help that will be just right to your requirements leading up to a painless transition ahead.