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Shaping the future of employee ownership in the UK: The Government consults on Employee Ownership Trusts (EOT)

We’ve seen an increase in popularity from businesses looking to transition to employee ownership via an EOT, so in this blog we’ll explain briefly how these work and why the government will be consulting on these…

EOTs explained

Employee-owned businesses are those where the majority of the ownership lies with the employees and an Employee Ownership Trust (EOT) is a special type of trust that can facilitate this structure. 

In a sale transaction to an EOT, the seller(s) sell a majority of their shares in the trading business to the special entity trust (i.e. the EOT). Surplus cash/assets and profits from the trading company are then contributed to the EOT, which in turn pays the seller(s) and issues a debt to cover any remaining consideration which is repaid over time from the trading company’s profits. 

This is a simplified explanation, but we discuss this process and much more within our comprehensive guide to EOTs which you can download here.

The benefits of EOTs

For the Sellers – EOTs eliminate the need to find an external buyer or sell to a competitor, thereby preserving the company culture and independence. Additionally, there are potential tax benefits for the sellers which will likely form part of the government’s consultation, which we’ll cover later in this blog. The sellers may also be keen to reward the staff that contributed to the company’s success, which leads to the next point…

For Employees - they’ll partially own the business, share the profits and can receive up to £3,600 income tax-free per year. This benefit comes without the need for their own financial commitment and without financial reward being reliant on a third-party sale. Overall, this sense of ownership, clear succession path and increased opportunities can lead to increased employee engagement and performance. 

What’s the need of the consultation?

In their policy paper, the government stated that the consultation aims "to ensure that the reliefs are closely targeted at incentivising EOTs as an employee ownership business model whilst preventing the reliefs from being used for unintended tax planning." This will likely involve examining the tax benefits of transitioning to an EOT for the sellers, which, unlike other exit strategies, incurs no capital gains tax on the consideration paid for their shares.

Certain conditions must be met to qualify for this tax relief, such as the requirement for the majority of the shares to be sold to the EOT and for the EOT to remain as such for the entirety of the tax year following the year in which it was sold. However, these rules are not overly restrictive, and we’re aware that HMRC is placing more scrutiny on these matters where they consider that exploitation of tax relief is the primary, or even, sole purpose of the transaction.

When advising on and implementing EOTs, we work closely with employee-owned and EOT experts Baxendale who welcomed this consultation. Emily Alston, partner at Baxendale, commented to us that “we really welcome this review, which gives us the opportunity to shine a light on the many successful employee-owned businesses who have benefited from the introduction of EOTs, whilst also allowing us to address some of the ways the current tax relief is being used and in turn protect the tax reliefs for genuine employee ownership into the future”.

What next?

We await the full consultation to be published later this year to determine if there will be any implications for EOTs implemented from 6th April 2024. However, if you are considering an EOT as an exit route, it may be prudent to explore this option sooner rather than later.
At UHY (East), we welcome the review, as we have successfully assisted several clients in implementing genuine EOTs for the benefit of all parties: the seller(s), the company, the employees and also arguably, the community, rather than for tax relief purposes.

If you would like to discuss whether an EOT could be a viable option for your business, please get in touch with j.foster@uhy-uk.com. You can also download our Guide to EOTs here.

Download the guide below 
 

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