Services

Employee Ownership Trusts (EOTs)

Looking for a tax-efficient business exit strategy that also empowers your employees? Hilton Smythe are here to act as your advisors and guide you through what can be a delicate process.

Selling a business to an Employee Ownership Trust (EOT) carries a 0% tax charge, making it one of the most tax-efficient ways to sell your business.

An experienced adviser like Hilton Smythe can help assess whether an EOT is the right fit for your company, provide an independent and accurate valuation, ensure you have the right legal representation, facilitate clear communication with all stakeholders, and guide you through the intricacies of funding and tax structuring, making the transition to an EOT a smooth and informed process.

What is an Employee Ownership Trust?

Introduced in 2014, Employee Ownership Trusts (EOTs) are a government initiative aimed at incentivising employee ownership by empowering business owners to sell their shares to an employee-owned trust, without the burden of Capital Gains Tax (CGT).

With EOTs, rather than selling shares directly to employees, the business transfers a controlling interest to a trust established for their benefit.

Advantages of an EOT:

Tax benefits: Disposal of shares into an EOT does not incur any capital gains tax or inheritance tax liabilities for owners, while value of bonuses will be subject to corporation tax reductions. An EOT can also pay annual bonuses of up to £3,600 to employees free on income tax.
Greater certainty than a trade sale: A lot can go awry in a typical trade sale, however EOTs come with greater certainty of completion, providing a quicker and more streamlined exit route for shareholders.
Existing owner can retain involvement: The existing shareholder can retain some involvement (up to 49%) in the business, allowing them to provide ongoing guidance and mentorship and allowing for a controlled and gradual exit route.
Improved employee engagement: Employee ownership improves employee engagement, incentivising staff retention and improving morale.

Eligibility for an EOT:

The company being sold must be a trading company. Principle companies of a trading group also qualify.
Eligible employees must generally be offered a piece of the pie on the same terms. You can switch things up a little based on things like earnings and length of service but broadly, all employees will need to benefit.
A sale must be for at least 51% of the shares in the business and in the same tax year. You won’t be able to stay on as a director or employee if the sellers or those closely connected (spouse/family members, etc.) make up more than 40% of the workforce.

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How Hilton Smythe can help?

Strategic review: We will assess the suitability of an EOT for your company, considering key factors and exploring alternative structures.
Tax and legal structuring: We can guide you through the process of seeking appropriate legal counsel in the drafting and settling of trust deeds, which outline the governance, rights and responsibilities of the trust. Navigating the complexities of tax law will also require professional expertise.
Determining a fair and accurate business valuation: An honest, independent and accurate valuation is key to ensuring fairness for all stakeholders in an EOT. Hilton Smythe can carry out a tailored financial analysis and valuation, using a variety of valuation approaches, while factoring in comparable transactions in your industry and wider market trends.
Planning for any required funding: We can help you navigate the funding landscape, negotiating deferred considerations/earn outs, or connecting the EOT with third-party funders.
Communicating with all stakeholders: Moving to an Employee Ownership Trust (EOT) requires collaboration between various parties, such as employees, current owners, and potentially interested investors. Open and transparent communication throughout the process is crucial to achieving consensus and facilitating a seamless transition. A qualified business and corporate finance adviser like Hilton Smythe can be a valuable asset in creating communication materials that keep all stakeholders informed and involved.

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