Employee Ownership Trust (EOT)- A tax efficient alternative to a Management Buy Out (MBO)

What is an Employee Ownership Trust

An Employee Ownership Trust (EOT) is a special form of employee benefit trust introduced by the Government in September 2014.

The EOT Scheme was set up in an attempt to encourage more shareholders to move to employee ownership, albeit via an indirect holding. The incentive for business owners is that the Government introduced generous tax breaks to encourage shareholders to move to an employee ownership model.

However, in order to qualify for the tax incentives, the employee ownership needs to be structured in a particular way.

The benefits of an Employee Ownership Trust

If you own a trading company, you can sell some, or all, of your shares to an Employee Ownership Trust (EOT) (subject to satisfying certain conditions) for full market value without incurring any capital gains tax liability in a way which also benefits your employees.

A summary of the key benefits include:

  • Employees can indirectly buy the company from its shareholders without having to source their own funds
  • The directors can remain with the company post-disposal
  • No income, capital gains or inheritance tax liabilities should arise on the disposal of a controlling interest
  • Not all shareholders are required to sell their shares to the EOT
  • The sale process may be quicker, with potentially lower fees
  • Shareholders can sell their shares for full market value (an independent valuation is required)

Qualifying Conditions for sale

There are five key conditions to meet:

  1. The company whose shares are transferred must be a trading company or the principal company of a trading group
  2. The trustees of the EOT must restrict the application of any settled property (the shares) for the benefit of all eligible employees on the “same terms”
  3. The trustees must retain, on an ongoing basis, at least a 51% controlling interest in the company
  4. The number of continuing shareholders (and any other 5% participators) who are directors or employees (and any persons connected with such employees or directors) must not exceed 40% of the total number of employees of the company or group
  5. Trust property must generally be applied for the benefit of all eligible employees on the same terms but the trustees may distinguish between employees on the basis of remuneration, length of service and hours worked.

Important Information

The content of this webpage should not be construed as financial advice.

The benefit of tax relief depends on the individual circumstances and is assessed at the point a claim for relief is made.

Tax rules could change in the future and the availability of tax relief is not guaranteed.