Employee Ownership Trusts – Worth considering for your food or drink business at any time

19 July, 2019

Whilst the likes of John Lewis may grab all the headlines for employee-owned businesses, smaller food and drink businesses are also reaping the rewards of this type of business structure–Fresca Group, Wilkin and Sons and Riverford are just a few. 

Employee ownership trusts (EOTs)  were introduced as a concept in 2014 and have been gaining currency with around 300 up and running.  Interest has been generated in part from the tax-efficient exit available to business owners selling their shares to an EOT, but their primary purpose is to transfer ownership of the company to its employees, thus increasing individual engagement, retention of key staff  and a stakeholder culture.

What is an Employee Ownership Trust (EOT)? An EOT allows for “indirect” employee ownership of the business.  It is a specific vehicle (a trust) which purchases a controlling interest in the business  and holds it for the benefit of all the employees of the business.  It therefore differs from other “direct” employee share ownership schemes like Enterprise Management Incentive (EMI) schemes or Employee Share Ownership Plans, but in some cases can be used alongside them.

What are the potential benefits of establishing an EOT?

To qualify as an EOT and reap the tax benefits, the trust needs to satisfy a number of conditions set out in the legislation which are aimed at ensuring the shares and any income arising are held fairly for all employees.  Assuming the conditions are met, then there are the following advantages:

For Business Owners

  • a 100% exemption from capital gains tax (CGT) on a disposal of shares in a business to an EOT. This may be of particular interest to shareholders who do not qualify for entrepreneurs’ relief (ER) or whose gain exceeds its maximum lifetime limit.
  • employees don’t have to fund the purchase out of their own pockets
  • shares can be sold for full market value
  • not all shareholders are required to sell their shares to the EOT
  • the directors can remain in place 

Also, an EOT can be simpler to operate than a “direct” share ownership scheme.  It avoids the administrative and tax complications of having to establish an “internal” share market through which to buy and sell shares for joiners and leavers, and ongoing administrative requirements to prove market value and report share acquisitions and disposals to HMRC.

For Employees

In addition to the potential benefit of having the business owned and operated by the trustees for their benefit, there is a specific income tax emption of up to £3,600 per tax year on bonuses paid to qualifying employees by the company which is controlled by an EOT.

How does an EOT work?

Generally speaking, there are three key steps that need to be carried out.

  1. A qualifying EOT is set up (typically) with a corporate entity as a trustee for the EOT (Trustee Company).
  2. Under a share purchase agreement, the shareholders in the company sell their shares (or at least 51% of the shares) to the Trustee Company. The consideration for the shares is funded by the company, or by third party debt (or a combination of both).  Where there is insufficient cash available at the date of sale, the shareholders may accept part of the payment is deferred over a number of years.
  3. The company continues to trade and generate profits. These profits (after tax) are used to make contributions to the EOT and the EOT will use these contributions to repay the loans or the outstanding purchase price that it owes to the shareholders.

An EOT structure is particularly well suited to food and drink businesses, where much of the value of the business lies with the employees. Employees often feel more incentivised with an EOT in place because they have a stake in the business. This can help employees commit to the business for the longer term and help promote its future.

See our Employee Share Incentives page at: https://www.crippspg.co.uk/businesses/employment/employee-share-incentives/.

For further information or advice on Employee Ownership Trusts or other Employee Incentive Schemes, please contact Kevin Finlayson on kevin.finlayson@crippspg.co.uk or Elizabeth Middleton on 01892 506 080 or at elizabeth.middleton@crippspg.co.uk or visit our website at www.crippspg.co.uk.