Employee Ownership Trusts have become more popular, especially since the Covid-19 pandemic. In fact, since 2020 the employee ownership sector has more than doubled in size. With the value of employee ownership trusts growing over the last few decades more and more businesses have implemented them, such as Go Ape, Richer Sounds and Aardman Animations.
Between 2020 and 2021 250 new employee-owned businesses were established. When surveyed by the White Rose Centre for Employee Ownership 70% of businesses said they saw employee-owned companies as a socially responsible thing to do. 77% also said that contributing to society and the environment was part of their decision to implement an Employee Ownership Trust.
The Covid-19 pandemic forced business owners to re-evaluate their values, putting pressure on business owners to adapt to the demands of employees. Companies also had to battle the impact of the Great Resignation, where many people left their jobs for another workplace that aligned better with their core beliefs. As a result, more people became aware of Employee Ownership Trusts.
If you’re thinking about selling to an Employee Ownership Trust, this blog will explore their pros and cons, helping you understand whether it is the right decision for your company.
What is an Employee Ownership Trust?
Employee Ownership Trusts are a business model where the share capital of a business is partly or entirely owned by its workforce. It’s also the fastest growing form of business ownership in the UK.
Employee Ownership Trusts (otherwise known as EOTs) were introduced in September 2014 and are a government initiative that allows owners to sell shares to an employee ownership trust without having to pay capital gains tax on the sale proceeds. EOTs are designed to hold shares in the Company for the long term on behalf of its employees. In addition, a company which is controlled by an EOT can pay tax free bonuses to its employees of up to £3,600 per person per year.
However, as you would expect if a sale to an EOT is to have these tax advantages there are certain conditions that have to be satisfied. Some of the most important are:
- The company must either be trading or be the holding company of a trading group.
- The trust must have control of the Company - so it must acquire more than 50% of the shares carrying more than 50% of the votes. If the trust ever loses control of the Company the capital tax benefits will be clawed back.
- Any benefits received by employees from the trust, as well as any tax free bonuses paid out by the Company, must be to the benefit of all employees on similar (though not necessarily identical) terms.
- The trust cannot make loans to the employees.
The Pros Of An Employee Ownership Trust
There are a range of benefits that come along with an Employee Ownership Trust, including:
- Tax advantages - When you sell shares to an Employee Ownership Trust you benefit from a sale with no capital gains tax. Going forward, the employees can also benefit from tax-free bonuses.
- It provides a seamless transition - Opting for selling to an employee ownership trust removes the stress and complications that come with looking for a buyer that matches the values of your company.
- It improves employee retention and attraction - When you opt to sell to an EOT you can take the opportunity to set up structures to involve employees more in the running of the business, making them feel valued and improving career progression opportunities, increasing the chances of attracting and retaining staff.
- The sellers can remain as involved in the company as they would like to be - Sellers can choose the extent they would like to be involved within the company, whether that’s through being a Director, being a minority shareholder or working part or full-time.
- Contracts stay the same - Selling to an EOT means there’s no change to trading, so although it may be necessary to check the terms and possibly amend some customer contracts, orders or property leases, to reflect the new owner, the key terms of those arrangements as well as the employment terms of the staff should stay the same.
The Cons Of An Employee Ownership Trust
As always when there are benefits, there are also some disadvantages. Some examples include:
- Selling shareholders may not receive all of their money immediately - Without raising third-party finance (for example, getting a loan from a bank) a significant amount of the purchase price will remain outstanding and will need to be paid on a deferred basis. The sellers and the EOT trustees can choose how quickly this remaining debt is settled, but it is usually paid over 4-5 years.
- Tax implications - While Employee Ownership Trusts can have advantages, there are also some drawbacks including:
- The tax relief on the sale won’t apply to any interest charged on the outstanding purchase price.
- The capital gains tax relief on sale is clawed back if the company is sold in the future.
- Future generations are unlikely to receive significant capital growth, however, the business model can be adapted for direct shareholders.
- As with all business sales, the sellers will need to check if any key contracts have a change of control clause. If they do, it's crucial that the seller checks if approval to the change of ownership is required.
How can Legal Clarity help with Employee Ownership Trusts?
Here at Legal Clarity, we have a range of Employee Ownership professionals that can help you effectively navigate whether an EOT is right for you. If this isn’t the best option for your company, we can work with you to find an alternative that will highly benefit your business and everyone in it.
When you work with our EOT experts we’ll help you secure a tax-efficient exit for your shareholders in a way that rewards your employees and protects your business culture. We will also:
- Explore all disposal options with you and ensure that you have the information to choose a route that meets your goals and expectations - whether or not that is a sale to an EOT.
- Should you decide an EOT is the correct course, prepare the legal documentation necessary to meet your commercial objectives whilst ensuring that the conditions required to obtain the EOT tax benefits are applied and your shareholder's expectations are met.
- Liaise with other professional advisers instructed by you and yourselves to make the whole process as smooth and straightforward as possible.
So if you’re looking for further advice on selling to an Employee Ownership Trust, get in touch with Legal Clarity today.
