Employee Ownership Trusts (EOTs): Key considerations – Moore Kingston Smith
Guest Blog by Harpreet Gill, Moore Kingston Smith
Moore Kingston Smith is a leading UK firm of accountants, lawyers and business advisers. With over 60 partners and more than 500 staff based in and around London, we are a leading member of the international accounting and consulting network, Moore Global.
As well as providing accountancy, tax, legal and corporate finance services, one of the areas we specialise in includes Employee Ownership Trusts (EOTs). EOTs continue to grow in popularity as a way of engaging with employees while providing an alternative exit strategy for business owners who do not want to pursue a third-party sale.
This article looks at the key considerations to contemplate before going ahead with an EOT.
How do EOTs work?
Business owners sell a majority stake to a trust benefiting employees, who can then also enjoy a tax-free bonus of up to £3,600 each year from the company.
Owners can receive full market value for their shares – generally via a mixture of up-front consideration from existing cash reserves and deferred consideration funded from future profits of the business.
A significant upside is that owners can sell to the EOT without incurring a capital gains tax (CGT) liability. This feature of EOTs will continue to make them popular given the reduction in the lifetime allowance for Business Asset Disposal Relief in 2020 (formerly known as Entrepreneurs’ Relief), and the still anticipated increase to the rate of capital gains tax.
EOTs are particularly relevant to businesses where people are the key drivers of the company. They provide the opportunity to increase employee engagement and improve recruitment and retention rates and are also suitable for corporate social responsibility profiles.
When implemented carefully, there are many advantages of EOTs for shareholders, companies, and their employees.
Key issues to consider
So, what are the key issues that need to be addressed when selling to an EOT?
- The sale to the EOT must be at market value. Input from a professional is always recommended. Amongst the issues to address is the impact, if any, the pandemic has had on the long-term rather than the short-term value of the business.
- Meeting the requirements of the tax rules is important to make sure that the benefits of selling to an EOT are secured.
- Talk to a tax expert first to ensure there are no surprises down the line.
- If you are not selling 100% of the shares to an EOT, make sure there are sufficient shares to avoid the EOT being diluted below 51%.
- Don’t over complicate the sale arrangements and give HMRC ground for questioning the commerciality. A zero% rate of capital gains tax is generous, so don’t put it at risk.
Legal and governance
EOTs were introduced as a means of encouraging employee participation in the running of the business and regard must be had as to how they will be involved once a sale has taken place. There are no prescribed rules for this, but it is important that employee participation can be demonstrated. This could involve appointing employee representatives to the board of the trading company, and/or appointing them as trustees of the EOT. You should consider having a forum where information about the business is exchanged with employees. In some cases, this could take the form of an employee council with its own rules.
So, the key issues to address as part of the legal work are:
- Ensuring engagement with staff so they feel involved and understand the benefits for them.
- Understanding how your role in the business will still be vital but different.
- Considering the way any deferred consideration will be paid out of future profits of the business.
Moore Kingston Smith offer a complete business advisory service around EOTs all under one roof encompassing tax, legal, corporate finance, HR and accounting services. Having implemented many EOTs already, we are well placed to advise you throughout the whole process: from the initial discussions to determine if it’s right for you, to supporting you with the communication of the completed transaction to your employees and the outside world.
Moore Kingston Smith are delighted to be Platinum Exhibitors at the EOA Annual Conference 2021. Please visit our EOT networking tables to hear more about our experience with successfully implementing EOTs. The ‘door is open’ on 16 November to 18 November.