Employee Ownership Trust – What does this mean to our clients?

In the following post, Stuart Sheldrick discusses how an Employee Ownership Trust can benefit those clients who are thinking of exiting their business with no current succession in place…

If clients do not have a succession plan in place, have they considered an Employee Ownership Trust (EOT)?

Clients will want to know their companies and people are in good hands for the future, and for some a way of exiting their business could happen by using an EOT.

If clients do not have a natural succession plan in family, or a management team in place willing to step up, or perhaps they don’t see any other ways to exit the business, then an appropriate alternative could be to set up an EOT.  An EOT gives a controlling stake in the business to all employees and has a number of benefits, both in terms of outright finances and for the potential future success of the company too.

Creating a smooth succession

An EOT involves setting up a trust to be run by all employees, who will then have a controlling say in the future direction of the company. It provides a quick and streamlined route out of the business for owners who cannot or do not want to run the company any longer and creates a real incentive for staff to drive the company forward, since they have a stake in its success.

EOT’s give business owners the comfort of a natural succession plan and removes many of the issues and risks that come from selling to external parties, whether that’s the financial sale, legal and administration, or simply the potential buyer’s long-term intentions for the company.

Also, where staff are particularly key to the success of the business, EOT’s provide reassurance that the company can retain its good people and continue to flourish. In fact, in most cases the EOT structure encourages greater loyalty and engagement from staff towards the company, because they are more closely tied to its success.

Financial benefits

It’s not just the future of the company that could financially benefit from being under an EOT.  Although it is often proven that innovation and performance within companies increases under the arrangement because of the mutual benefits for all staff, there are tax benefits too:

• For owners – setting up an EOT allows them to exit the company smoothly, without any capital gains tax or inheritance tax to consider on the disposal of the business.
• For staff – being part of the EOT ownership structure allows all employees to receive an annual bonus up to £3,600 free of income tax, as it will come through the trust rather than as part of their salary.
• For the company – these bonuses can be deducted before the corporation tax calculation is made, thereby reducing the bill the company faces.

Assessing whether an EOT will work

For any owners considering this route, the first step is to ensure you have the right advisors on board ahead of time. Due to the nature of the trust arrangement and the tax implications, EOT’s require a lot of planning at the beginning. A range of qualifying criteria needs to be met along the way, which require professional support, including:

• The company must be currently trading.
• Trustees of the EOT must hold more than 50% of the company, and therefore voting rights, share capital, profits, and assets on wind up.
• Eligible employees should hold trust assets on the same terms (some exceptions exist for previous shareholders).
• The trust assets can be applied to employees based on criteria such as salary, hours and length of service. Those staff with less than a year’s service can be excluded.

Although EOT’s were once only considered for much larger companies, there are some advisors such as us, who have the expertise to set up and manage trusts for a range of different companies. The value comes from advisors with the right insight to not only identify whether this is a possible route to take, but to manage the whole process and advise the trust in the aftermath of the handover.

If you are aware of clients who could benefit from understanding more about EOT as part of their succession planning, please pass their contact details to stuart.sheldrick@lbgroupltd.com