Employee Ownership Trust (EOT)
Introduced by the Finance Act 2014, the Employee Ownership Trust ( EOT) is a form of indirect employee ownership which aims to provide business owners with more sustainable and tax advantageous ways of running a business, alongside strategic succession planning for themselves, their employees and their business. In its simplest terms, an EOT is a collective ownership structure where the company’s shares are held in trust for the benefit of all the company’s employees as beneficiaries.
What legal documents are required to set up an EOT?
An EOT is governed by a trust deed and an appointed board of trustees to manage the EOT.
In order to set up an EOT, the existing shareholder or shareholders of the company will sell all, or a majority, of their shares to the EOT, which is then managed by an appointed board of trustees on behalf of the employees.
How does an EOT impact control over a business?
The EOT will typically acquire a controlling interest in the company, with the selling shareholders transferring over a majority (51%) of their shareholding.
Whilst day to day management and decision making for the company will remain with the existing board of directors, the trustees are also under a duty to ensure that the company is managed in such a way that benefits the employees as beneficiaries.
This means that trustees are required to be involved in key decision making. However, the trustees must ensure their decisions comply with the objectives of the trust deed as well as consider the long-term impact of any decisions on the company and workforce.
How does an EOT differ to existing forms of employee ownership?
An EOT is a form of indirect employee ownership, where the shares are held in a separate trust and managed by an independent board of trustees.
In comparison, there are other existing forms of employee ownership available, such as Employee Share Schemes, where shares are held directly by the employees themselves. This is a form of direct employee ownership which entitles the employees not only to receive a share of the group’s annual profits, but also actively participate in the running of the company.
Whilst there are some similarities between direct and indirect schemes of employee ownership, there are also key differences which require careful consideration:
- Under an EOT, the employees hold their shares through a separate trust which is managed by an independent board of trustees. This means the employees have to act via the appointed trustees for their decision making.
- EOTs are viewed to as a way to effectively reduce the administrative burden of employee ownership on a company as an employee will automatically cease to be a beneficiary of the EOT once they leave the company – this means the company does not have to deal with the buyback of those employee’s shares, reducing associated time and costs.
- In order to be a qualifying EOT for HMRC purposes, all employees must be entitled to participate in the trust on equal terms. However, the company does have the ability to set out certain eligibility requirements for participation in the trust deed, such as minimum length of service.
- EOTs require a trust deed and the appointment of an independent board of trustees.
- There are certain governance arrangements which need to be considered, such as regular meetings between the board of trustees and the board of directors.
- The EOT will have no money and therefore most EOT purchases are funded by the target company itself, with many taking on bank borrowing to assist. You should therefore consider how this funding will impact the cash flow and financial health of the business in both the short and long te
Your next move?
Setting up an EOT typically takes between three to six months, depending on the complexity of the business and the availability of funding, with the starting point being for the shareholders to formally agree the valuation of the target company and then to seek HMRC clearance to the transaction.
Therefore, starting early and involving experienced professionals from the start can help streamline the process.
If you have any questions, or if you wish to make an enquiry online please click the 'contact us' button, or alternatively you can call our corporate team on 0114 266 6660.
