Why are Employee Ownership Trusts Growing in Popularity?

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By David

The business landscape is a trying one for business owners at the moment. Competition is high as ever, and costs are continuing to increase owing to Brexit trade issues, global unrest and the UK hitting the highest rate of inflation for 40 years.

While many businesses are managing to weather these times and continue to grow, there are business, the instability has inspired other business owners to sell – but with a stagnant market, selling to competitors represents an inefficient way to extract value from a company. But there is one particular kind of business sale which is growing in popularity, and which circumvents many issues posed by the present times: the Employee Ownership Trust.

What is an Employee Ownership Trust?

An Employee Ownership Trust, or EOT, is a method by which the majority of shares in a business are transferred to a trust that acts on behalf of said business’ employees. The scheme has a number of key benefits for business owners, shareholders and staff alike, being a unique way to re-distribute ownership and its associated perks while also offering tax benefits to the seller.

EOTs were codified into law in 2014, as part of the Finance Act. The scheme was based on the John Lewis Partnership’s business model and corporate structure, where the staff collectively own a controlling stake in the business and can help steer its path – and reap the rewards as a result.

Why Have EOTs Gained Popularity Over Time?

The EOT as a scheme was designed to incentivise its uptake, ensuring more businesses were placed in the hands of their workers – a potential route to righting the economy in the aftermath of the 2009 recession and subsequent austerity measures. As such, certain perks were written into the legislation to make EOTs a lucrative option for business owners in the market to sell.

In order to set up an EOT, the trust must receive at least 50.1% of all available shares. Shareholders are not forced to sell, but if they do so the sale of their shares to the EOT is exempt from Capital Gains Tax – and they receive the full market value of the shares they sell. Employees also benefit, both as a result of collectively gaining a controlling stake and individually becoming eligible to receive up to £3,600 per year tax free, as a bonus.

The EOT Process

Setting up an EOT is a time-consuming process, and also one which can be difficult to reverse in the event of a business owner wishing to retain control. As a result, a business needs to be certain of their decision to transfer ownership before they begin, and also be willing to spend up to a year administrating said transfer. HMRC can grant clearance for an EOT within four weeks, but completing the process of transfer will take months at minimum.