Unlocking the Power of Employee Ownership Trusts for Your Business.
Are you a business owner considering selling your business? If so, have you ever thought about who the right buyer might be? What if the answer was right under your nose, or rather, right inside your office?
This is where Employee Ownership Trusts (EOTs) come into play.
What are Employee Ownership Trusts (EOTs)?
EOTs were introduced in the 2014 Finance Act, as a specific type of discretionary trust set up for the benefit of your company's employees. It provides a unique opportunity to sell your business while reaping several benefits for both you as the owner, and your employees.
One of the key advantages is that an EOT creates an immediate purchaser where otherwise there may be none. It allows shareholders to sell their shares at full market value, which can be funded by the company's future profits.
This unique setup empowers employees who wouldn’t otherwise have the funds or risk appetite to buy out majority shareholders.
More than just financial gains. 💸
But it's not just about the financial benefits - it's about creating a more engaged, motivated and loyal workforce. The EOT model encourages employee ownership, rewards loyalty, and fosters innovation. When employees feel a sense of ownership, they're not just employees - they're invested members of the business, and they're more likely to bring innovative ideas to the table.
We've seen time and again that when employees have a stake in their workplace, they're less likely to be absent, and more likely to stay with the company for longer. That's not just good for them, it's good for business, creating a more stable and productive environment.
What's more, EOTs even allow for tax-free bonuses to be paid out to employees, up to £3,600 per employee per year. This can be a fantastic way of rewarding your team for their hard work and dedication.
Understanding the challenges.
While EOTs can offer a fantastic opportunity for business owners and their employees, it's important to understand that they're not a one-size-fits-all solution. Just like any business decision, EOTs come with their own unique challenges that need careful consideration.
One potential hurdle is the financial risk involved. For instance, unless external financing is obtained, the purchase price of the shares sold to an EOT will be paid over time from the company's profits. If the company doesn't remain profitable and cash-generative, payment of this price could be at risk. This means that while EOTs can create an immediate buyer and offer tax advantages, they also require a steady stream of profitability to meet their financial obligations.
Another area to consider is the role of the trustee. The trustee, who is independent, must always act in the best interests of the employees - the beneficiaries of the trust. This means that the sellers must trust the trustee not to trigger a disqualifying event, which could lead to withdrawal of tax relief. This level of trust is vital to the successful functioning of an EOT.
Qualifying criteria.
Setting up an EOT involves ticking off a checklist of strict criteria. You'll need to grapple with the trading requirement, where your company must be deemed to be trading and not involved substantially in non-trading activities. Then there's the all-employee benefit requirement, ensuring the EOT benefits all eligible employees on equal terms, fostering a sense of fairness across your business.
Another box to tick is the controlling interest requirement, where the EOT must hold a controlling interest in your company. This usually means selling at least 51% of your business to the trust. It's a big step, but one that can lead to significant rewards. The limited participation requirement is another hurdle, where no person with a trust interest should have owned more than 5% of the company's share capital in the 12 months prior to the disposal.
Finally, you'll need to meet the related disposal requirement, which essentially means the sellers or their connected persons must not have been involved with a related disposal in an earlier tax year.
Disqualifying events.
Another key aspect to understand are disqualifying events. Picture this as a relay race, where sticking to your lane and following the rules is crucial to reaching the finish line successfully.
Disqualifying events are key conditions that need to stay in place until the end of the tax year following the one in which the disposal happened. If any of these conditions are not met, it could result in a capital gains tax liability for the trustees.
Some examples of disqualifying events include:
The company ceasing to meet the trading requirement.
The Employee Ownership Trust (EOT) no longer meeting the all-employee benefit requirement.
The EOT losing its controlling interest in the company.
The participator fraction exceeding 2/5 (unless this is for less than six months and beyond the trustee's reasonable control).
The trustees acting in a way which the trusts, required by the all-employee benefit requirement, do not permit.
Navigating the EOT Process with Ashton McGill.
At Ashton McGill, we're all about growth, progression and improvement. We understand that an EOT might not be the right fit for every business, but when it is, it can be transformative.
When an EOT is the right fit, it can fundamentally reinvent the way a business operates and evolves. It does more than changing ownership; it cultivates a culture of shared responsibility, collective growth, and mutual benefit. It brings a unique sense of motivation and dedication that can only come when employees know that they are not just working for a business, but are an integral part of it.
What’s more, the financial benefits of an EOT, such as the ability to sell shares at full market value and tax-free bonuses for employees, can significantly bolster the overall financial health of the business. It's a win-win scenario that combines business growth with employee well-being.
Yet, as transformative as an EOT can be, it's not a one-size-fits-all solution. Every business is unique and deserves a tailored approach.
That's where we come in.
At Ashton McGill, we're here to guide you, helping you understand if an EOT is right for your business and how to navigate the process. Our approach is always empathetic, supportive, and forward-thinking, ensuring you have the knowledge and confidence to make the best decision for your business. 🙌