An Employee Ownership Trust (EOT) is an alternative business ownership structure with specific benefits to both owners and employees. It involves the employees of the business holding a controlling stake in a trading company via a specifically designed trust. This is intended to facilitate participation and engagement in the running and direction of the business, with benefits for both corporate governance and profitability. The John Lewis Partnership is a leading example of a private company with the largest EOT model in the UK. Other examples include Aardman Animations, Arup and Richer Sounds.
- For business owners: when the EOT acquires the majority of a company's issued share capital, the outgoing members can claim exemption from capital gains tax (CGT) on gains made after disposal of their shares. Furthermore, it is possible to seek advance clearance from HMRC, providing certainty on the tax position.
- For employees: qualifying employees of a company may receive income tax free bonuses of up to £3,600 per person, per annum.
- Greater employee engagement;
- Encourages ownership and collective responsibility for the company's performance;
- Provides a cost-effective and tax efficient option for business owners looking for an exit; and
- Potential tax-free remuneration for employees.
- Employee engagement - It is important to ensure that the EOT is represented adequately in order to avoid conflicts between directors and shareholders. To establish effective employee governance and ensure transparency, the following steps could be taken:
- The appointment of employee representatives to the board of directors.
- Elect employees to form an employee committee/council to be consulted by the board of directors.
The steps outlined above allow employees to become co-owners of the business. This could significantly improve employees' relationship with the business and boost employee engagement, productivity, and commitment.
- Controlling interest requirement - The EOT is required to acquire at least 51% of the businesses' total shares to qualify as employee-owned to attract all of the benefits outlined above. A partial sale will allow the shareholders of the business to retain a stake in the business. This is beneficial for owners who intend to use the EOT as part of their retirement/exit planning.
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