Employee Ownership Trusts

An alternative exit

What is an Employee ownership Trust?

An Employee Ownership Trust (also known as an EOT) is a trust created to hold the majority of shares (more than 50%) in your company. It’s a way you can offer indirect ownership to your employees giving them a collective, controlling equity interest in your business.

This model offers compelling tax advantages for your selling shareholders and a clear framework for your company when it transitions into employee ownership. By giving your staff a controlling stake in the business, it means the company is run for their collective benefit (subject to paying the debt owed to the selling shareholders).

In short, it’s a common and tax-efficient way for:

1. Shareholders to exit (tax-free) without having to sell to a third-party buyer.
2. Businesses to incentivise their people by transitioning to employee ownership.

Contact an EOT expert

How does an Employee Ownership Trust work?

An EOT is set up to meet all legal requirements and tax qualification conditions.
Existing shareholders sell 50.1%-100% of the total shares in the company (for an independently agreed value) to the EOT. This gives the employees a controlling equity stake in the company which is held and managed by the trustee(s) of the EOT (usually a company acting through its trustee directors).
As the EOT has no assets and no means of generating assets, the existing company shareholders usually allow the trust to pay the price later on deferred terms (or external finance can be raised to pay a larger amount on day one) .
The purchase price is paid to the former shareholders in a series of payments raised from company profits. These instalments are often spread over a number of years (as profits become available) and are exempt from capital gains tax. Effectively, the creation of and sale to the EOT is funded using ongoing company profits.
There’s also an additional option to pay income tax-free bonuses of up to £3,600 per year to employees.

2010

Our first deal (which led to an EOT controlling stake in 2014)

£702.4m

Value of EOT transactions we advised on since 2019

56

EOTs completed by Legal Clarity since 2019

£10.9m

Average value of EOTs advised on in 2022-2023

33 (and counting)

EOTs completed and in progress in the last 12 months

Types of Employee Ownership

Direct share ownership

Direct Ownership involves employees owning shares directly in the company in their own name. Employees can obtain shares in various ways, such as:

Share Incentive Plan (SIP)
A Save As You Earn (SAYE) share option scheme
Enterprise Management Incentive (EMI) share option scheme.

Indirect ownership

Indirect ownership involves shares being held collectively in an employee ownership trust. This provides employees with an indirect stake in the company as they’re not on the register of shareholders and have no rights to receive dividends, vote or buy and sell shares. The trustee(s) of the EOT own the shares on the employees’ behalf.

Hybrid ownership

Hybrid ownership contains a mix of the two with a controlling stake held in trust and the remaining shares held by individual employees directly (e.g. senior management team) which can offer tax benefits and give certain employees even greater equity incentives.

Discover more about the different types of ownership, in our blog ‘Navigating Growth with Employee Ownership Trusts’.

Short-term benefits of Employee Ownership Trusts

It gives you the option to choose an exit where there’s no obvious third party purchaser.
It can help shareholders get a quick and streamlined exit route.
You can gain a tax free disposal by UK individual shareholders.
Owners can retain up to 49.9% of equity.
Minority share capital is still available to incentivise management and key employees.

Long-term benefits of Employee Ownership Trusts

It can help to improve employee morale and retention.
It helps to encourage innovation and interaction at all levels.
EOTs can help to boost business performance by enhancing engagement, communication and business/stakeholder values.
Employee Ownership Trusts can enable stakeholder employees to be more closely aligned with business goals.
Employees have greater incentives which bolsters retention, morale and performance.

Main Tax benefits of Employee Ownership Trusts

1. Owners will be able to sell to the EOT free from capital gains tax.
2. Companies controlled by EOTs can pay annual bonuses of up to £3,600 to employees free of income tax.

Gary Davie

Legal Clarity Partner and EOT Lead

Gary acts as lead adviser on our EOT transactions, and as a trustee director including chairing the trust board of The 1:1 Diet Business (winner of Employee Ownership Business of the Year). Drawing upon his experience in a whole range of approaches to employee ownership – MBOs, trusts and hybrid models – he will guide you to the right employee ownership structure for your business.

The Legal 500: "The ‘outstanding’ Gary Davie, reputed for his capabilities in employee buyouts."

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Jane Jevon

Tax Expert and Trusts Specialist

With years of experience guiding businesses large and small through employee ownership, Jane is a go-to advisor for business owners contemplating transition to an EOT. Jane will talk you through the alternatives, explaining the individual impact of every option. She can work with you to plan a succession route that matches your ambitions for your business.

Client Testimonial: ''Jane was our main contact who is excellent. I could not rate them more highly.''

Who are Employee Ownership Trusts for?

Retiring business owners who are unable (or unwilling) to sell to a third party – particularly if this means selling out to a competitor.
For shareholders looking to release capital quickly. The reduced need for due diligence increases deal certainty and allows a swifter transition to new ownership.
Start-ups who want to promote EOTs as an innovative benefit to attract and incentivise employees in a competitive talent market.
Established companies can use EOTs to reinvigorate their strategy by making their people part of their growth ambitions.
Distressed businesses may find EOTs offer a route to recovery by securing long-term business independence.

How can Legal Clarity help?

At Legal Clarity, we pride ourselves on having a team of experts who will help you make the most of your Employee Ownership Trust. While there are no industry exemptions or size limits for EOTs, certain conditions will need to be met and your trust will need to be structured and managed in a way that qualifies for tax relief and other benefits.

Due to this, we:

Evaluate your exit strategy

We’ll explore all disposal options with you and make sure an EOT meets your goals and expectations.

Design your EOT

We’ll design a bespoke model that meets all EOT qualifying conditions, so tax benefits apply and your shareholders’ expectations are met.

Support the sale process

We’ll prepare all share transfer and trust documentation to ensure a swift process and legal compliance.

We’ll also work with you to find an alternative exit route if you decide an Employee Ownership Trust isn’t right for you.

Discuss your exit options today!

"Gary was highly professional and very personable which made the whole process very straightforward. If Employee Ownership is right for your company, I would have no hesitation in recommending Gary to arrange it for you"

"It’s a natural fit.
The Legal Clarity team aren’t just lawyers, they’re human beings. We could trust them to take care of the legal stuff, but we also know they really got who we are and what we wanted to do.
It just felt right."

"I cannot thank you all enough for your tremendous hard work, diligence and assistance with [the Project]. It’s really felt like a team effort and whilst hard work has been a brilliant amount of fun. I’ve been taught a huge amount, so thank you all for your patience."

How do I find out more about Employee Ownership Trusts?

Get in touch

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