Since they were effectively introduced by the Government in 2014, the number of businesses that have become controlled by Employee Ownership Trusts (EOTs) has grown rapidly.
From just 17 in 2014, the number of EOTs in the UK stood at 1,030 by the end of 2022.
And in many ways that is no surprise as they are good for everyone.
So who are the beneficiaries of an EOT?
Let’s find out…
Who Are The Beneficiaries Of An EOT?
Officially the beneficiaries of an EOT are the employees. They indirectly own a share of the business without investing any of their own money and are eligible to receive a share of the profits of the business each year, of which the first £3,600 is tax-free. If a business owner sells their business to an EOT they also benefit as there is zero capital gains tax payable on the sale proceeds provided certain criteria are met. Employee-owned businesses also tend to be more productive and grow more quickly.
The Official Beneficiaries of an EOT Are…
The answer is in the name, an Employee Ownership Trust benefits the employees!
Essentially a business owner is selling their business to its employees in a way that provides the employees two main benefits:
- They don’t have to pay anything for their share of the business.
- They receive a share of any profits of the business each year.
That is because the business is sold to a trust, which holds the shares of the trading company on behalf of employees.
The trustees of the EOT cannot benefit from the shares in any way, instead, the beneficiaries of the trust are the employees of the trading company.
So let’s dig a bit deeper into how employees benefit from an EOT
Profit Sharing: How It Works
So as we alluded to in the previous section, the big bonus for any employee working for an EOT is the fact they receive a share of any profits the company makes.
Even better the first £3,600 per year is completely tax-free.
For an organisation to benefit from this tax relief, it must meet two main conditions:
- The EOT must have a controlling stake (51% or more) in the trading company.
- All eligible employees must benefit from the trust and must do so on the same terms.
That second point doesn’t necessarily mean that every employee has to receive the same amount of profit share at the end of each year, instead, it means that the EOT cannot skew benefits to the advantage of individual employees.
The EOT can however allocate differing benefits depending upon factors such as salary, length of service and/or hours worked.
For example, the EOT could set a bonus of £100 for every year worked at the trading company, provided it was applied universally to all employees.
EOTS and Employees: What Else to Note
So far we have established that:
- Employees are the beneficiaries of an EOT.
- They receive a share of the profits from the trading company each year, with the first £3,600 tax-free (providing the EOT owns 51% or more of the trading company).
- All eligible employees must benefit from the trust and on the same terms.
There are also a few other points to note when it comes to how employees benefit from an EOT:
- A company can require an employee to have worked for the company for at least twelve months before becoming a beneficiary of the EOT.
- Any employee who holds, or has held, 5% of the share capital in the business may not be a beneficiary of the EOT from the perspective of a future business sale, but they CAN qualify for ongoing profit share.
- Relations or dependants of a deceased employee can have the option of becoming a beneficiary.
The one thing that should be remembered is that if an employee leaves the company they cease to be a beneficiary, as they don’t individually own anything, their share of the company is owned by the EOT.
Check out our Frequently Asked Questions page for answers to a number of questions about EOTs and how they work.
What About the Business Owner?
Whilst the employees are the bonafide beneficiaries of an EOT, the structure has benefits for everyone, including the business owner.
Go EO was borne through website founder Chris transferring a controlling stake of his firm to an EOT in 2021.
The big benefit for business owners considering going employee-owned is that there is zero capital gains tax payable on the sale proceeds.
This is opposed to the 10% rate of tax they would most commonly pay if the business was sold to a third party.
But alongside that, there are a number of other benefits to a business owner selling their business to an EOT:
- EOT sales are usually quicker and easier, as both the buyer and seller are on the same side.
- For this reason, EOT transfers tend to be less expensive than third-party sales.
- The business is independently assessed and accordingly sold at a fair market value (or below if you want to give the staff a great deal!).
- It allows an owner to limit the risk to the future of their employees and reduces the risk of the company being swallowed up and disappearing into a larger organisation.
If you are considering going the EO route, please get in touch with us if you have any questions.
Alternatively you can also visit our page detailing the options open to the Founder of a business after selling their business to an EOT.
There is a Benefit For Just About Everyone
The truth is, pretty much everyone benefits if a company becomes employee owned.
Aside from the direct benefits to the employees and to the business owner, studies have shown that employee-owned businesses are more productive, grow more quickly and have a greater staff retention rate amongst many other things.
In fact we outlined the numerous benefits in our blog post asking if it is good if a company is employee owned?
And all of this also benefits the economy. The Employee Ownership Association estimates employee-owned companies contribute over £30billion to the economy each year.
Summary
In the official sense of the word the beneficiaries of an EOT are the employees of the company.
They receive a share of the profits of the business each year and don’t have to invest any of their own money to do so.
That is because the owner sells the business to a trust which holds the shares of the company and manages them on behalf of the employees. The trust pays the owner gradually over a period of time.
An extra perk is the first £3,600 of profit share per employee per year is completely tax-free.
But in short, everyone feels the benefit of an EOT in one way or another.
For the business owner there is zero capital gains tax payable on the sale proceeds when transferring a company to an EOT, for the company itself productivity and growth both increase and as a result the economy gets a big boost too!
It is win, win all round!
If you are interested in finding out more about transitioning to an EOT, get in touch with us at Go EO to see how we can help.