How does an Employee Ownership Trust Work?

Business owners who are looking to sell up and move on have several different options to consider. Among the most appealing of these is the Employee Ownership Trust. This is a means through which a business can come to be owned by its employees. This provides a number of key benefits, many of which go beyond the sentimental.

How does an EOT work?

This kind of employee benefit trust was brought in by the UK government in 2014, with the aim of incentivising businesses to follow the example set by John Lewis.

Unlike other forms of benefit trust, an EOT requires that the trust acquire a controlling stake in the company. The price paid is determined by a market valuation, typically arrived at by an impartial, outside assessor. Trusts of this kind must benefit all employees equally – not just a few of them.

In an EOT, the employees of the company don’t actually own the company outright. Rather, it’s the trust that actually does the owning – the employees are simply beneficiaries of the trust.

Who does an EOT work well for?

For business owners looking to preserve their legacy in the business, and ensure continuity after they’ve left the organisation. It tends to be the preferred choice for business owners who are heavily involved in the day-to-day running of the business.

Under certain circumstances, this is a tax-efficient means of giving up control of a business. If the idea of a sale on the open market does not appeal, and you don’t want to trigger a management buyout either, then this might appeal.

What are the benefits of an EOT?

One of the chief virtues of an EOT is that it allows owners who are close to the business to gradually reduce their involvement over time, reducing the need for a sudden transition. In many cases, you’ll end up benefiting financially, as the government provides a range of capital gains tax exemptions for owners in this position.

The government seeks to incentivise this kind of transition for several reasons. To begin with, it reduces instances of absenteeism (and presenteeism). This is one of several factors driving general improved performance of the business. It’ll also provide employees with a greater incentive to contribute to the business, and a greater interest in its long-term prosperity. After all, if you own a piece of the business, you’re more inclined to work to develop it.