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To sell your business to an employee ownership trust (EOT) and qualify for the associated tax benefits, your business needs to tick a few boxes. Our eligibility checker helps you quickly understand if your business qualifies. But some of the concepts are complex. Here, we delve into more detail to help you understand how to answer the questions in our checker.
Company status
Company structures can be complex. But to qualify for the EOT tax reliefs, the shares being sold must be owned by individuals, not by other companies.
If your trading company is currently owned by a holding company, and you own that holding company, then it’s the shares in the holding company that need to be sold to the EOT in order to qualify for the tax relief. This structure works only if you're happy for the EOT to own the entire holding company – including any other businesses or assets it might hold. If you'd prefer to keep other bits of the group outside the EOT, things can get more complicated. This could involve restructuring the holding company – which is something you should discuss with your accountant.
Controlling stake
Transitioning to an EOT is a tax efficient way to become employee owned. However, to qualify for these tax perks, the EOT must acquire at least 51% of shares. Essentially, you are relinquishing control of your business to the EOT (and by extension your employees).
You don’t have to sell 100% – some founders keep a stake, and sometimes key team members are given share options. But the EOT must always hold the majority.
Put simply, if you want to keep control of the business, selling to an EOT probably isn’t right for you.
Profit sharing
One of the big EOT tax perks is that every year the first £3,600 of your employee’s profit share bonus is tax free. However, there is a rule around how this bonus is distributed. It states that profit share payments must be equitable. The key point here is that you can’t single out individuals positively or negatively, so it can’t be performance based.
There are a range of ways you can split the profit equitably, such as length of service, hours worked, seniority etc. You can get creative with how you carve up the profits, but must not single individuals out.
Remember, your business will still be able to award pay rises, performance-related bonuses and other discretionary bonuses, however, these will not qualify for EOT tax relief.
Participator ratio
This rule initially sounds straight forward but can easily get very complicated. The aim of the rule is to try to prevent companies with multiple shareholders and minimal employees from benefitting from the tax perks.
To qualify under this rule, the number of participators must be less than, or equal to, 40% of total employees. So, what is a participator?
- Someone who owns 5%+ of the company.
- Any close relative on the payroll (think spouses/civil partners, siblings, children, nieces, nephews, parents, aunts, uncles).
Here are two examples to show how this works in practice:
- Sarah owns 100% of her business and has 10 employees
That’s 1:11, making the participator ratio 9%, so her business qualifies. - Four siblings own 25% each of their business and employ 2 people
That’s 4:6, making the participator ratio 67%, so this business does not qualify.
The other aspect you need to be aware of is that the ratio must have been under 40% for more than 12 months before the date of the sale to the EOT. And it must remain in place for four to five years post the EOT sale date.