What is an employee ownership trust (EOT)?
An employee ownership trust (EOT) is a trust established for the benefit of the employees of a business. Selling a majority stake in your company to an EOT will mean that your employees will have an indirect interest in the business, potentially leading to increased performance and commitment, as well as a number of additional benefits:
- A disposal of a majority shareholding in a company to an EOT will generally be free of capital gains tax, income tax and inheritance tax.
- Bonus payments of up to £3,600 per year can be made to employees of the business, tax-free.
- Full market value for the shares can be realised by the selling shareholders.
- The shareholders do not have to sell all of their shares, so can continue to have a stake in the business, and can remain as directors of the company post-sale.
In order to sell shares to an EOT and realise the benefits outlined above, a company (which must be a trading company or a holding company of a trading company) will usually be incorporated to act as the trustee of the EOT. The relevant company and the EOT trustee will enter into a trust deed, under which the property held by the EOT trustee, such as the shares in the company, are held for the benefit of the company’s employees.
The company’s shareholders will then agree to sell more than 50% of the shares in the company to the EOT Trustee. Depending on how the transaction will be funded, the purchase price may be left payable on deferred terms so as to allow the dividends received by the EOT trustee from the trading company to be used to pay the purchase price.
What is required to qualify?
In addition to the requirement that the relevant company must be a trading company, there are certain additional requirements which must be met in order for the transaction to qualify for the tax treatment benefits:
- The “all-employee benefit” requirement. The terms of the trust must not permit the trust property to be applied other than for the benefit of all the business’ employees, to transfer the property to another trust, or to make loans to the trust beneficiaries.
- The “equality” requirement. Any distribution from the trust fund, or payment under a bonus scheme, must be for the benefit of all eligible employees, on the same terms.
- The “controlling interest” requirement. The EOT trustee must hold at least 50% of the ordinary share capital, voting rights, profit entitlement and entitlement to assets on a winding-up.
What are the benefits?
You will appreciate this tax-efficient structure provides another exit opportunity to management alongside trade sale, traditional MBOs (VIMBOs, MBIs, etc.), listings and asset sales. This allows management partially to de-risk their investment and unlocks tax-free capital to invest elsewhere.
Bearing in mind the succession issues experienced by owner-managers since the financial crisis of 2008, this structure is well worth considering as part of clients’ financial planning.
This structure is also well suited to professional service firms where ownership and capital value may be barred due to the high cost of buy-in. Using this method would incentivise and tie in valuable members of teams and ensure a fruitful final exit for management and employees
How can we help?
If you would like to discuss the benefits of implementing an EOT structure, we would be happy to discuss it further with you. Bermans can assist in all aspects of the transaction, including:
- Setting up the company to act as the trustee of the EOT.
- Preparing the trust deed between the company and the EOT trustee, detailing the terms on which the company’s shares will be held for the benefit of the employees.
- Preparing the constitutional documents of both the company and the EOT trustee.
- Drafting and advising on the share purchase agreement relating to the sale of the shares to the EOT trustee.
- Advising on any documents or structures relating to the funding of the transaction.
A share buyback (a process whereby shares in a company are bought by the company itself and cancelled) is a popular and relatively less-complex way for companies to provide an exit route for, or return surplus cash to, its shareholders. Whilst the law and procedure for carrying out a share buyback is quite clear and straightforward, we have dealt with a number of instances where the validity of a share buyback has been questioned and further action required to be taken in order to ratify the validity of a buyback transaction.
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Stephen joined our Manchester based corporate team as a partner in April 2018.
Stephen has a degree in law and qualified as a solicitor in 1991.
His focus is mainly on company formations, mergers and takeovers, disposals and MBO/MBIs, as well as general commercial contracts and advice.
His clients are both regional and national and range from sole traders to large companies.
Outside of work, Bolton based Stephen enjoys going to the gym, supporting Manchester City, gardening and spending time with his granddaughter.
Tel:0161 827 4616
Holly studied Law at York Law School within the University of York, graduating in 2016. She then went on to study at the University of Law in Manchester where she completed the LPC with a Masters in Law, Business and Management in July 2017.
Before joining Bermans Holly was a member of the management team at the Disney Store in both Liverpool and York. She also has had some experience with the Walt Disney Company’s legal team and worked as a civil clerk at 7 Harrington Street Chambers.
Outside of work Holly loves the outdoors and enjoys doing anything creative or with a competitive element.
Holly is currently working in Bermans Property and Corporate departments.
Tel: 0151 224 0524
Adam graduated from the University of Huddersfield in July 2017, having completed the Masters of Law and Practice and receiving a First Class Law degree and a Distinction in his LPC.
Adam is currently working in Bermans Asset Finance and Corporate departments, dealing with securities and corporate transactions.
Being a snowboarding enthusiast, Adam often during the winter, spends time on the slopes of the mountains of Czechia.
Tel: 0161 827 4608
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Anton Stirrett joined our Liverpool based Corporate team in January 2017 as a Partner.
Anton qualified as a solicitor in 2001 following his law degree, and specialises in all forms of corporate transactions including business acquisitions, MBO’s, MBI’s and corporate re-organisations.
Anton prides himself on working with clients to form close working relationships to understand their requirements and to ensure that work is completed within tight timescales and within agreed budgets.
Anton specialises in advising SME’s and owner managed businesses but also has expertise in the healthcare sector, in particular pharmacies and dental transactions.
Outside of work, Anton likes to spend time playing golf and football and running.
Tel: 0151 224 0514