BUSINESS owners looking for a sale route are increasingly considering selling to an Employee Ownership Trust (EOT), writes Becky Maguire, a tax partner at Garbutt + Elliott.

EOTs have only recently come onto the radar of many companies and their advisers but in the right situation they can be a fantastic alternative to a trade sale or a Management Buy-out.

What is an EOT?

An employee trust is simply a trust set up to act in the interests of the employees of a business.

More specifically an EOT is governed by rules introduced by the government in 2014. There are tax incentives for both the vendor (0% CGT) and the employees (a potential tax free £3,600 bonus p.a.)

A typical structure involves the current shareholder(s) selling a majority shareholding in their business to an EOT at market value often on deferred terms and some EOT structures involve external finance.

Why Now?

In our experience working on several EOT projects, there are 4 main factors :

1. The 0% Capital Gains Tax (CGT) headline is attractive - especially when the current low rate of CGT appears to be under threat.

2. Some business owners like the fact that employee ownership provides them with an exit route.

3. The relative simplicity of an EOT sale is attractive for owners who may have been through deals in the past and do not have the appetite to do so again or do not want their business sold to a competitor/ larger player.

4. EOTs are being talked about more and advisers are becoming comfortable with them meaning they are in the melting pot in conversations.

Whilst EOTs are relatively simple to implement compared to a third-party trade deal, it is important that advisers are joined up and understand the specific rules with corporate finance, tax, accounting, and legal advisers working together as a team alongside the shareholder(s).

Engaging with both the proposed trustees of the EOT and the wider employee base is an important part of the process and should not be overlooked. The positive culture and motivation that can be created via an EOT is worth harnessing and engaging employees in the right way will help achieve this.

If you have any questions about any of the points raised above or want to know more about EOTs, please do get in touch.