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The benefits of Employment Ownership Trusts.

What is the best way to motivate your staff and get them to buy into giving their maximum support to the company?

Give them a pay rise? Offer a company vehicle? Boost their pension contributions?

All of these are likely to provide motivation, but they involve an immediate cost and don’t encourage staff to be invested in the company.

That is where Employee Ownership Trust (EOT) could be the ideal solution.

Introduced in 2014, EOTs are becoming more common, with 250 new EOTs being established in the 18 months to June 2021 and growth believed to have continued through the rest of 2021 and into 2022.

EOTs can give business owners looking for an exit strategy an opportunity to sell their shares to an employee-owned trust free from Capital Gains Tax whilst rewarding their team.

With staff recruitment and retention a critical issue at the moment, this can offer owners a great way to create an effective and tax-efficient succession strategy for their business.

How do EOTs work?

Employees do not directly own shares. These are transferred to a trust that later benefits employees.

This is somewhat akin to co-operative business models, like the Co-operative itself and the John Lewis Partnership.

The existing shareholder(s) must sell at least 51 per cent of the share capital of the company to the EOT.

It is often the case that some of the consideration payable by the trust is contributed by the company itself, although external funding is also used in some cases.

If some of the consideration is deferred, then this is usually paid out of the future profits of the company.

What are the benefits?

  • It gives workers a financial stake in the business.
  • Since the introduction of the scheme, the disposals of shares via EOTs have been exempt from Capital Gains Tax, which allows the owners to get the most value from what they have invested in the business.
  • Divestiture of these shares will also be exempt from any potential Inheritance Tax bill, ensuring more wealth is passed to beneficiaries.
  • It encourages owners to develop a corporate structure that encompasses employee ownership.
  • You are not taking part in a hostile buyout, so it provides a smooth transition of the company to the employees, allowing management to focus on running the business.
  • It saves the owner hunting around for a buyer, saving on professional fees like due diligence, and the stress that comes with an acquisition.
  • Tax-free bonuses of up to £3,600 to employees can be made available, free of income tax, but not National Insurance.
  • For the company itself, a Corporation Tax deduction for the value of the bonuses will be available.
  • Employees have a say in how the company is run, known as ‘employee engagement’.

Under this engagement, employees can influence decisions through:

  • A staff council;
  • Workers groups; and
  • Worker directors appointed to the board.

The employees have a stake, but do not become owners and do not have control – that remains with the board of directors.

This new relationship encourages all involved to drive the company forward, increasing productivity and job satisfaction as well as the financial rewards.

Are you thinking of transferring your business to an EOT? Contact us today for expert advice.

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