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The Employee Ownership Trust

Updated: Apr 19, 2023

How the employee ownership trust works...

The management team continue to run the company; however, the trustees of the trust ensure the company is being well managed maximising employee engagement. The trust may expect to engage with the board about decisions which have a significant bearing on the employees’ working environment and welfare.

Employee Ownership Trust

The management board may report back to the trustees 3 or 4 times a year especially with issues relating to employee welfare.

The trustees hold the assets of the trust, comprising the shares of the company for and on behalf of the beneficiaries as set out in the Trust deed.

Repayment of the consideration is made using post tax distributable reserves via the trust. Loan note repayments are tax free, however income tax is due on any interest charged. Staff bonuses are paid via the company not the trust.

To qualify as a tax advantaged employee ownership trust, certain criteria must be met:

Trading requirement – the company must be trading at the time of disposal and not include any substantial elements of investment or non-trading activities. It must continue to fall under this trading requirement for a period of time after the transfer.

• All employees must be beneficiaries of the trust

Employees must be treated equally in the distribution of profit share benefits

• However, trustees are allowed to allocate profit shares based on:

o A multiple of salary

o A flat payment

o Pro-rating

o Years of service

o Qualification period

In most cases a corporate trust company is formed, and the trustees are appointed to the company as directors limiting the personal liability of the trustees. This arrangement also enables trustees to be removed and appointed. One of the benefits of an Employee Ownership Trust is that the trustees and the employees are not exposed to personal liability for the purchase price.

Trustees of the trust normally comprise the previous owner, a representative of the employees and an independent trustee who is neither an employee nor a founder. The EOT will normally seek to preserve some legacy company values and values important to its employees moving forward.

Most owners stay on as employees, however current and former owners cannot be beneficiaries. Trusts tend to waive the rights to dividends as they are not tax efficient.

Some vendors make allowances for the employees to sell the shares of the company should the option arise in the future; however, the company would have to achieve significant growth for this to become mutually advantageous. Equity warrants can be secured for departing shareholders.

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