Employee Ownership Trusts Solicitors London

A sale of a business to its employees, albeit via a trust, is seen as a simpler, more friendly way to exit the business. There is no need to find a buyer, making it a quicker and a smoother transaction and the seller has fewer liabilities by virtue of the fact that the transactions typically involve a limited number of warranties and indemnities. It imparts a sense of ownership to employees of the business that can improve staff retention and recruitment, with staff potentially qualifying for a £3,600 tax-free cash bonus every year.

Importantly, an exit via an EOT may reduce the uncertainty over the future of a business when its founders wish to step down, potentially by protecting jobs and the culture and values that may have been created.

For the business owner and shareholders, there are considerable tax advantages, notably a 100% relief on capital gains tax subject to compliance with the tax rules for EOTs.

One further advantage is that business owners and shareholders need not sell their entire shareholding. They can, should they wish, retain up to a 49% interest in the business and continue to work and contribute to its continued growth. The shareholders will need to have less than 50% of the share interest in order to satisfy the controlling interest requirements. This requirement also looks at voting rights, distribution of profits, and assets on a winding up.

As a full-service law firm, Bishop & Sewell is able to utilise the expertise of our colleagues – such as our employment and personal tax lawyers – throughout the process of setting up an EOT. 

If you need legal advice on setting up an Employee Ownership Trust, speak to our Employee Ownership Trust lawyers today. 

There are, as you would expect, strict qualifying criteria that must be met for a successful sale to an EOT. These include:

• Only shares of a qualified trading company can be transferred into an EOT. If part of a group, only the principal trading entity can be transferred.
• Trustees of the EOT must acquire a controlling share (at least 51%) of the business.
• The trust must be applied for the benefit of all eligible employees on the same terms. However, the trust can distinguish between employees depending on pay, hours worked and length of employment.
• The number of employees holding more than 5% of the company cannot exceed 40% of the total number of employees.

Generally (but not always), the EOT will have to be set up by the company whose shares are going to be sold (the “Target Company”). This is generally done through a trust deed. In practice most of the times the trustee of the EOT may be a private company limited by guarantee with individual employees of the Target Company appointed to the board.

The actual documentation and process for sale to an EOT will in most situations be similar to a classic share purchase.

A sale to an EOT does require HMRC tax clearance to confirm that the sale of shares, and any future contributions to the EOT, is not being carried out for tax avoidance purposes.

It will also be necessary to seek an independent valuation of the business and the shares to be sold ensuring the EOT and shareholders are paying and receiving a fair value. Bishop & Sewell enjoys strong relationships with various accountancy firms that can undertake these valuations.

Any exit from a business by its founder or shareholders will be complex and both the shareholders and the EOT should take expert legal advice to ensure the sale proceeds smoothly.

Bishop and Sewell can assist you with legal side of setting up an EOT.

If you have any questions in this respect, please contact Ionut Florin Tihulca, Solicitor in our Corporate and Commercial department or any one of our EOT experts.