What are Employee Ownership Trusts?

Employee ownership trusts involve business owners selling the controlling stake of their company into a trust for the benefit of the employees.

The Government has introduced generous tax breaks in order to encourage wider employee participation and ownership. Provided the right conditions are met, this structure carries significant capital gains tax advantages for the seller and an attractive succession outcome for all parties involved.

Who might consider an Employee Ownership Trust

 Many types of business use Employee Ownership Trusts but the most common are:

  • founders looking for a business exit strategy, for example due to retirement
  • owners of the new companies looking to attract and retain new talent, particularly in businesses with relatively flat structures
  • business owners who would like their employees to hold a stake in the company to reward hard work and encourage productivity

What are the qualifying conditions and the key steps?

In order for the selling shareholders to qualify for the tax incentives, the following key conditions must be met:

  • the shareholders of a trading company must be selling over 50% of total value of the shares in the company
  • the sale must be for the benefit of the employees of the company
  • the trust must treat all the employees on an equitable basis (on the “same terms”)

The structuring of the transaction will depend on whether the sale is vendor financed or whether third party financing needs to be obtained to support the change of control.  The vendor funded sale of business to the Employee Ownership Trust, generally requires the following key steps to be completed:

  • Employee Ownership Trust established and the Trustee Company incorporated
  • the purchase price determined following an independent valuation of the company (essentially determining “fair market value”)
  • a “transaction in securities” clearance with HMRC
  • the shareholders selling their shares under the share purchase agreement to the Trustee Company

Key benefits

  • tax advantages for shareholders – potentially a complete CGT exemption
  • tax advantages for employees – tax effective employee share plans can be introduced effectively and up to £3,600 can be paid per employee per annum tax free as bonuses
  • purchase price determined on “fair market value” basis provides certainty to the selling shareholders
  • possibility to retain the outgoing owner’s business expertise and making a smooth transition
  • relatively low risk transaction with low level of disruption
  • greater employee engagement and commitment

How Jurit LLP adds value

We are a market leader within the EOTs sector. We have advised over 20 clients on the EOT transactions with an aggregate consideration of over £300 million, having worked with both vendors and third party financing entities, such as banks and their legal teams.

Our experience

We have extensive experience of advising businesses selling into Employee Ownership Trusts in the following industry sectors, with an aggregate consideration of over £300 million.

Key people

Jeremy Glover, Partner