EOT’S were established in 2014 with the aim of promoting employee ownership as a business model in the UK, some of the better-known ones include Waitrose & John Lewis, Richer Sounds plc and Hodge, Jones and Allan (a London based law firm). An EOT itself is simply a trust established for the benefit of all employees of a business which owns shares in the company that owns the business.
Why use an EOT?
In order for EOT’s to gain traction as a business model, the government made using EOT’s very attractive by granting them a number of tax reliefs:
- First and foremost, any individual who disposes of shares in a company to an EOT will be exempt from capital gains tax (CGT), which means that as of today’s date, a saving of up to 20%. This will become more important in the future with rumours that there will be changes to the rates of CGT (of up to 45%) and/or the potential abolition of Entrepreneur’s Relief/Business Asset Disposal Relief (which currently reduces CGT to 10% for the first £1m of sales proceeds during an individuals’ lifetime);
- Secondly, the EOT can pay each employee a bonus of £3,600 per year free of any income tax; and
- Finally, relief from inheritance tax on certain transfers into and from the EOT.
There are a large number of conditions that need to be satisfied in order to obtain the tax reliefs, including:
- The EOT must be available to all employees;
- All employees must be treated equally;
- The EOT must hold more than 50% of the ordinary share capital of the company; and
- The target company must be trading.
However, there are many more conditions that must be met in order to successfully establish an EOT and we would be more than happy to work with you and your accountant or tax advisors on structuring the EOT.