Dear Members,
Another excellent article from Andrew Watkin from Assynt CF.
EOTs on the Rise: Tax-Efficient Exit or Cultural Legacy
Overview
This email highlights the growing popularity of Employee Ownership Trusts (EOTs), with 671 set up in the past tax year (up from 474). EOTs allow business owners to sell a majority stake to a trust for employees, offering tax advantages—most notably, exemption from capital gains tax if specific conditions are met. Compared to management buyouts, employees incur no cost. However, there are financial risks and upfront costs, including professional valuations and legal setup. While third-party sales may offer higher proceeds, EOTs can preserve company culture and legacy. The document also includes links to further resources and a contact for advice.
More details
Employee Ownership Trusts (EOT) can boost productivity as employees have a far greater investment in a company’s success.
They also come with tax benefits for the owners.
There are more than 2,250 employee-owned businesses in the UK.*
Owners usually pay capital gains tax on the sale of their company shares. They can benefit from Business Asset Disposal Relief, whereby the first amount of the gain up to £1 million is taxed at 14% (from April 2026 the rate will be 18%) and thereafter at 24% for higher and additional rate taxpayers. There are several conditions including the fact shares must be held for 2 years prior to the sale.
Where an owner sells to an EOT, no capital gains tax is payable providing several conditions are met, provided a minimum number of the shares are sold to the trust.
Unlike a management buy-out, employees do not have to pay anything when a trust tis set up.
Typically, the vendors receive proceeds of the sale in instalments from the company’s existing surplus cash and future profits. In some cases the trust may be able to borrow the whole consideration.
Is it worth it?
In a nutshell, yes, providing the owner receives all the consideration, otherwise the tax benefits come to nothing.
So, careful consideration needs to be given about the risks especially the ability of the company and its management to repay any outstanding consideration.
There are significant costs to consider, a professional valuation to be agreed with HMRC, setting up the trust and any pre-sale planning.
Moreover, where there is a willing buyer in the market, it is likely they would pay more for the shares.
More importantly, for some owners, there is the wish to retain the culture, legacy and employment with the reputation of the company enhanced,
More information can be found by clicking the following links.
Changes to EOTs announced in the October Budget 2024 https://www.assyntcf.co.uk/employee-ownership-trusts-eots-october-2024
Employee -owned businesses an overview https://www.assyntcf.co.uk/employee-ownership-trusts-2
The legal bits https://www.assyntcf.co.uk/employee-ownership-trusts-the-legal-bits
The taxation incentives https://www.assyntcf.co.uk/employee-ownership-trusts-the-taxation-incentives
Some more information https://www.assyntcf.co.uk/more-about-employee-ownership-trusts-eots
Contact details
If these arrangements are of interest to your clients and you believe a chat with me would be useful, please contact me on 07860 898452 or by email awatkin@assyntcf.co.uk I look forward to hearing from you.
Disclaimer
As the reader will appreciate, the information contained in this note is at a very high level.
It is for general information purposes only. The information is provided by Andrew Watkin who endeavours to keep the information up to date and correct. Neither he nor Assynt Corporate Finance Limited make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability or availability with respect to this note or the information, products, services, or related graphics contained on the website for any purpose.
Any reliance you place on such information is therefore strictly at your own risk.
In no event will we be liable for any loss or damage including without limitation, indirect or consequential loss or damage, or any loss or damage whatsoever arising from loss of data or profits arising out of, or in connection with, the use of this note or the website.
*According to the White Rose Employee Ownership Centre, a research organisation, and the Employee Ownership Association, a trade group.
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