At Bracey’s Accountants, we are committed to providing our clients with clear and comprehensive information on various business structures and financial instruments. One such structure gaining popularity is the Employee Ownership Trust (EOT). But what is an employee ownership trust, and how can it benefit your business? In this guide, we’ll explore the concept, benefits, and potential problems associated with employee ownership trusts.

Understanding Employee Ownership Trusts

An Employee Ownership Trust (EOT) is a business structure that allows employees to collectively own a significant stake in the company they work for. This model was introduced in the UK in 2014 to encourage more businesses to transition to employee ownership, promoting a more engaged and motivated workforce.

What Is an Employee Ownership Trust?

An EOT is a trust established to hold a controlling interest (usually more than 50%) in a company on behalf of its employees. The trust is designed to ensure that the company is run in the best interests of the employees, aligning the success of the business with the wellbeing and motivation of its workforce.

Key Features of Employee Ownership Trusts

1. Collective Ownership: Employees collectively own the company through the trust, rather than owning individual shares.
2. Control and Governance: The trust typically holds a majority stake, giving it significant influence over company decisions.
3. Long-Term Focus: EOTs promote long-term thinking and sustainability, as the company’s success is directly tied to employee welfare.
4. Tax Incentives: There are various tax benefits for both the company and employees under an EOT structure, including relief from Capital Gains Tax (CGT) for the original owners and income tax exemptions on bonuses paid to employees.

Benefits of Employee Ownership Trusts 

Enhanced Employee Engagement 

When employees have a stake in the company, they are more likely to be engaged, motivated, and committed to the business’s success. This increased engagement can lead to higher productivity, better customer service, and improved business performance. 

Business Stability and Continuity

EOTs can provide a more stable ownership structure that can help ensure a company’s long-term independence. This stability is also beneficial for planning and implementing long-term strategies which can be valuable during economic downturns, industry disruptions or changes within the company itself.

Tax Advantages

One of the significant advantages of EOTs is the tax benefits. The selling owners can currently enjoy full relief from CGT on the sale of shares to the EOT. Additionally, employees can receive income tax-free bonuses of up to £3,600 per year.

Potential Employee Ownership Trust Problems

While EOTs offer numerous benefits, there are potential issues and challenges that businesses should be aware of:

Complexity of Establishment

Setting up an EOT can be complex and requires careful planning and legal structuring. It involves creating a trust deed, appointing trustees, and ensuring compliance with various legal and regulatory requirements.

Funding the Trust

Funding the trust to purchase shares from the existing owners can be challenging. The company may need to generate sufficient profits to finance the buyout, which can strain its cash flow and financial resources. 

Management and Governance

Ensuring effective management and governance within an EOT can be difficult. Trustees must balance the interests of the employees with the need for sound business decisions, which can sometimes lead to conflicts or inefficiencies.

Employee Understanding and Participation

For an EOT to be successful, employees need to understand and embrace the concept of collective ownership. This requires ongoing education and communication to ensure that employees are fully aware of their rights and responsibilities under the trust.

Why Consider an Employee Ownership Trust?

Despite the potential problems, EOTs can be an excellent option for business owners looking to secure the future of their company, reward their employees, and benefit from attractive tax incentives. By aligning the interests of employees with the success of the business, EOTs can create a more motivated and productive workforce, leading to long-term business success.

How Bracey’s Accountants Can Help

At Bracey’s Accountants, we understand the intricacies involved in setting up and managing an Employee Ownership Trust. Our experienced team can guide you through the entire process, from initial planning and structuring to ongoing management and compliance. We can help you navigate the complexities, maximise the benefits, and address any potential problems that may arise.

Conclusion  

Employee Ownership Trusts offer a compelling way to align the interests of employees with the success of the business. By providing a structure for collective ownership, EOTs can enhance employee engagement, ensure business stability, and offer significant tax advantages. However, setting up and managing an EOT requires careful planning and expertise.

If you are considering an Employee Ownership Trust for your business, contact Bracey’s Accountants today. Let us help you explore this exciting opportunity and ensure a smooth and successful transition to employee ownership.