Employee Ownership Trusts (EOTs) were popularised in the UK in 2014, inspired by successful models like John Lewis, where employee ownership led to high levels of employee engagement and satisfaction. This structure benefits the employees whilst offering a viable succession plan for business owners and a motivated workforce.
This Tax Natives guide for employees explores how EOTs function and the benefits found from this type of ownership model. Whether you’re a business owner considering this transition or an employee interested in understanding what an EOT means for you, the goal is to clarify the process and highlight the positive impact of employee ownership.
Key Points
- What is an Employee Ownership Trust?
- Tax Advantages of EOTs
- Considerations for EOTs
- Real-Life Examples of EOTs
- EOTs: The Future of the Workplace?
What is an Employee Ownership Trust?
An Employee Ownership Trust (EOT) is a company structure that allows business owners to transition ownership to the employees. This type of trust holds the shares on behalf of the employees, making them indirect owners.
EOTs aim to foster a culture where employees are more connected and committed to their company’s success, as they have a stake in the outcome.
What are the tax advantages of Employee Ownership Trusts?
One of the most significant incentives for setting up an Employee Ownership Trust (EOT) is its range of tax advantages, which benefit both employees and outgoing business owners.
Capital Gains Tax (CGT) relief
For business owners, one of the main benefits of transferring their business to an EOT is the relief from Capital Gains Tax (CGT).
This exemption means that when business owners sell their shares to the EOT, they don’t need to pay CGT on the profits from the sale. This can mean substantial financial savings, making EOTs an attractive exit strategy for business owners looking to retire or step back from day-to-day operations.
Income tax-free bonuses
From an employee perspective, one of the standout features of being part of an EOT is the potential to receive income tax-free bonuses. Each eligible employee can receive up to £3,600 annually without any income tax liability. This boosts employee morale and improves financial well-being, directly linking the company’s success to personal rewards.
Sustained employee benefits over time
The structure of an EOT is designed to ensure that employee benefits are sustained over a period of time. As long as the trust holds a controlling stake in the company, these benefits continue to accrue, aligning long-term employee interests with the ongoing success and stability of the business.
This setup encourages a more engaged and committed workforce, as employees see a direct correlation between their efforts and benefits.
What considerations should be made regarding Employee Ownership Trusts?
Indirect ownership structures
While Employee Ownership Trusts (EOTs) offer a unique form of indirect ownership that benefits employees, they bring certain complexities, especially in private companies.
EOTs manage the shares on behalf of employees who don’t hold the shares directly. This can sometimes lead to challenges in how individual employees perceive their influence and stake in the company’s decision-making processes.
Managing expectations of key employees
Key employees, especially those used to having direct control or a significant say in business operations, might find the transition to an EOT model challenging. They may feel that indirect ownership does not give them the same level of influence or reward they might expect from direct share ownership.
An effective way to mitigate some of the challenges of indirect ownership is by establishing an employee council. This can act as a bridge between the EOT trustees and the workforce at large, so the voices of individual employees are heard and considered. The council can help clarify how benefits are allocated, how decisions are made, and how key employees can still contribute to the company’s strategic direction.
Are there any real-life examples of Employee Ownership Trusts?
Richer Sounds
This UK-based electronics retailer transitioned to an EOT in 2019 when its founder, Julian Richer, sold a majority stake to the trust set up for the benefit of the employees. This move was motivated by a desire to ensure the company’s longevity and to reward the employees who had contributed to its success over the years.
Richer Sounds has since reported increased employee motivation and customer satisfaction, attributing these improvements to the sense of ownership among staff.
Mott MacDonald
For EOTs to be effective, they must meet strict tax compliance standards. A good example is the consulting firm Mott MacDonald, which transitioned to an EOT to maintain independence and employee focus. The firm successfully navigated tax clearance and regulatory requirements, setting a benchmark in the engineering consulting industry for how EOTs can lead to a more engaged and invested workforce.
Aardman Animation
Adopting an EOT structure often spans several years, as seen in the case of Aardman Animations, the studio behind Wallace and Gromit. The founders decided to sell to an EOT to preserve their creative legacy and keep the company independent. This transition was carefully planned to ensure a smooth handover and to maintain the studio’s unique culture and creative freedom.
Baxendale
In technology and creative industries, EOTs are increasingly used to attract top talent and ensure business continuity. For example, the software company Baxendale transitioned to an EOT to harness the innovative potential of its employees by making them stakeholders in its future success. This has led to a more collaborative environment and fostered a more profound commitment to the company’s goals.
EOTs: The Future of Workplace Ownership?
As businesses consider transitioning to an EOT, the complexities of setup and compliance cannot be underestimated. Here, the guidance and expertise of a professional network is invaluable.
Tax Natives, a global network of tax experts, is ready to connect companies with specialised corporate tax advisors who can help with this transition.
Whether you’re looking to understand the financial implications, the legal framework or implement an effective EOT strategy, Tax Natives can link you with UK tax advice professionals with the expertise and experience to make your journey towards employee ownership as smooth and successful as possible.
With the support of Tax Natives, your business can explore the potential of EOTs to improve employee engagement and secure a legacy that honours the contributions of every team member.