Could an Employee Ownership Trust Be the Next Big Thing?

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The employee ownership trust or ‘EOT’ is increasingly changing how businesses are bought and owned in the UK. Below, we explore the effect they are having on organisations. Then, we examine the EOT meaning and consider its pros and cons.

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Every Working Day a Company Becomes Employee-Owned

According to Professor Andrew Robinson from the University of Leeds, “At least one company becomes employee-owned every working day”. From 2022 to 2023, there was a 37% increase (332 organisations) in the number of employee-owned businesses.

From 2022 to 2023 there has been a 37% increase in the number of employee-owned businesses. 90% of them has come about since employee ownership trust legislation.

This was thanks to the employee ownership trust UK growing in popularity, taking the total to 1,418 companies. Professor Robinson explained how 90% of the current employee-owned businesses have occurred since EOT legislation was introduced in September 2014. He emphasised how this highlighted the mechanism’s importance in enabling businesses to become employee-owned.

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The Pros and Cons of the Employee Ownership Trust

What is an Employee Ownership Trust?

Before addressing the reasons for and against this mechanism, we will outline the meaning of EOTs. Essentially, they’re an initiative whereby business owners can sell their shares to a trust, exempt from capital gains tax. Here, employees won’t directly own shares in the company. Instead, a trust held for the benefit of all employees will obtain a controlling interest in it.

Why Might Businesses Sell to One?

Several reasons influence why businesses are sold to an employee ownership trust, where the shareholders, employees and the company all benefit. From a shareholder’s perspective, they can, among other things:

  • Sell their shares for full market value
  • Exit quickly, especially when there isn’t a third-party purchaser, as employees don’t have to invest their own funds to set up the trust
  • Dispose of the asset tax-free, providing they satisfy certain eligibility criteria
  • Retain an interest of up to 49% in the company

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However, they aren’t the only ones who could benefit. Unlike the standard sale of a company, employees aren’t likely to feel significant job disruption during the transaction. Furthermore, upon establishing employee ownership trusts, employees tend to feel more valued and perform better. To top it off, employees could receive up to £3,600 in tax-free bonuses annually, providing tax relief eligibility criteria are met.

Finally, selling to this type of trust could benefit the company itself. As mentioned, employees feel more valued under such trust, meaning a more productive, resilient workforce could result. Due to the added sense of value, companies could also find their employee retention rates improve. What’s more, the same value could attract talent to the business’s future employment opportunities.

What’s the catch?

With the extensive benefits an employee ownership trust can bring, some may question if it’s too good to be true. Although the trust provides several benefits, there are some cautions those involved must consider.

For starters, despite the sale under an EOT being certain, there’s no guarantee it will be at the best price. Had the business been sold to a third party, an offer above market value might have been made. 

Moreover, since employees don’t have to invest their own money into the trust, payment will likely be delayed. Therefore, a standard transaction might be better if an owner requires money upfront.

Finally, there are the tax considerations to take into account. Setting up this trust may affect other tax issues, and if not set up correctly, the tax benefits won’t be gained. As such, obtaining the right expert advice, which would come at a cost, is essential.

Despite this, selling a business to an employee ownership trust shouldn’t be overlooked. The tax benefits and employee productivity gained alone could influence potential sellers into making this kind of sale. With so many parties benefiting in a multitude of ways, it’s no surprise that these trusts are growing in popularity and will likely continue to take over.

We hope you enjoyed reading this article about employee ownership trusts in the UK. Subscribe to our newsletter now to ensure you don’t miss our future daily uploads. If you have any employment law issues, contact Redmans Solicitors, who are experts in the sector.

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