What is an employee ownership trust?

July 7, 2023

There are many great ways to reward your staff for their hard work, but have you considered giving your employees ownership of the business? Setting up an employee ownership trust (EOT) can be one of the most tax-efficient ways to do this.

Not only can an EOT reward your team for their loyal service, it can also improve productivity and boost morale in your company. But what exactly is an EOT, and how does it work?


Employee ownership trusts: the basics

An EOT is a Government-backed initiative which allows you, as the existing owner of a business, to offer indirect ownership of the company to your staff.

Rather than handing individual shares to each member of your team, an EOT will allow you to transfer shares into a trust, held by the company, for the benefit of its employees.

Usually, an EOT will hold a controlling interest in the company, acquired from its current shareholders, with shares being bought or sold at an agreed price. However, the price of the shares cannot be more than the market value and any payments to the original shareholders must be made in instalments. This is because an EOT is funded by the company’s future profits.

Once an EOT has been set up, it is managed by trustees who are independent of the company’s management team, usually something along the lines of an employee council. This ensures the EOT is led in a way that maximises employee engagement and commitment.


Reasons to set up an EOT

As a company director, you may choose to start an EOT if you’re looking to exit the business and leave it in the hands of the people working for you. It’s an efficient way to create a smooth succession plan, while thanking your staff for all of their hard work. Think about it – who better to leave your company to than the people that already know it inside and out?

Or, if you’re just starting the business, you might set up an EOT if you want it to be employee-owned from the outset.

Company owners may also consider setting up an EOT if they feel that a trade sale or a management buyout aren’t feasible options.

But there are more benefits to setting up an EOT other than boosting your staff’s morale.


EOT tax relief

Other than providing some level of reward to your team, an EOT can have some attractive tax relief incentives.

Anyone selling shares into an EOT won’t have to pay any capital gains tax and once a company is owned by an EOT, it can pay bonuses of up to £3,600pa to its employees completely free of income tax (but not National Insurance).

For these tax breaks to be possible, the EOT must meet the following conditions:

  • the trust must hold more than 50% of the company’s shares
  • any benefits from the trust must be available to all employees and all on the same terms.


Is an EOT right for your company?

Setting up an EOT can be a great way for you to reward your staff for their years of service – boosting morale and giving them a vested interest in the company.

Not only that, it can also be a tax-efficient way to create an exit plan should you decide to retire.

If you think an EOT could be the best move for your business, we would be more than happy to help you look into the planning process. For any advice and help on setting up an EOT, get in touch with a member of our team.

Ready to talk?

Dick Haffenden JCS

Then we’re ready to listen.

Tell us about yourself, your goals and what you need to achieve them and one of our team of friendly accountants will be in touch to begin the conversation.

020 8643 1166

jcs Accountants

Subscribe to our newsletter

By submitting your details you agree to receive email marketing from JCS Accountants and have read and understood our Privacy Statement. You can withdraw your consent or change your preferences at any time by emailing us or by clicking the link at the bottom of every email we send you.

You have Successfully Subscribed!