Bryn Anderson
Partner
Employee Ownership Trusts (EOT) Services
Transferring business control to the employees
Advisers on over 50 EOTs
Employee Ownership Trusts (EOTs) continue to be relevant due to the opportunities they present to existing shareholders, employees, and the company’s growth prospects.
EOTs can form a robust framework for long-term succession, enabling ownership to pass to employees in a way that supports the continuity, culture, and sustainability of your company.
For businesses with strong future prospects where shareholders wish to crystallise value while ensuring stability, an EOT is often a compelling option that offers a structured transition alongside meaningful tax relief.
EOTs allow a pathway for transitioning ownership, day-to-day management and strategic leadership to progress on aligned or separate timelines, providing founders, management teams and employees with significant flexibility.
Our credentials
Price Bailey has advised on over 50 EOTs in recent years, ranging from businesses valued at around £3m to those valued in excess of £100m.
Several of our Partners act as Trustees of EOT-owned Companies, giving us first-hand insight into the technical and practical aspects of operating within the EOT framework – it is a space we know very well.
Where appropriate, we have layered in additional planning particularly around management incentivisation, considered detailed Inheritance Tax (IHT) requirements, coordinated closely with an array of specialist lawyers, and resolved complex issues that have complicated other adviser’s processes in the past.
Some of our EOTs have been undertaken very quickly on accelerated timelines in as little as eight weeks – although we would not generally recommend this – while others are carefully crafted and implemented over twelve months. We can work to your needs and timelines.
Having been advising on EOT’s since 2020, we are now working with a number of clients that are looking at follow on transactions – secondary purchases of shares not held by the EOT, subsequent third party sales, or dealing with re-financing where original payment terms cannot be met.
Our expertise combines the commercial and M&A related structuring of EOT proposals, with valuation, financial modelling, corporate, income and inheritance tax advice.
Benefits for all
EOTs offer advantages for vendors, employees, and the company. A few key benefits that make EOTs a compelling option for succession planning and exiting a business include:
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Confidential alternative to a third party sale
An EOT lets you transfer ownership without the need to find an external buyer, something that is often highly stressful for owners and employees alike.
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A flexible transition
The day-to-day running of the business does not need to be overhauled immediately and can evolve gradually at a pace suited to all parties involved.
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Tax-free bonus potential
Employees may receive up to £3,600 annually in largely tax-free bonuses.
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Capital Gains Tax (CGT) relief
When an owner-manager sells a qualifying controlling interest of their company to an EOT, the transaction may benefit from CGT relief, with 50% of the gain exempt from CGT under the current tax regime, subject to ongoing compliance with EOT legislation.
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Blending with management incentives
An EOT transaction can also be blended with share incentives such as Enterprise Management Incentive schemes (EMI) or growth shares to incentivise and retain key management. Where used, we work carefully with the company and the sellers to ensure that the company remains compliant with statutory requirements as such arrangements may affect eligibility for certain employee ownership benefits.
Additionally, sellers do not have to sell their entire shareholding and exit at the point of the transaction. Provided that the EOT acquires and retains over 50% of the entire issued share capital, sellers can retain a minority interest in the business, allowing them to remain invested in the business while gradually stepping back over time.
Rising popularity of EOTs
Since the UK introduced EOT legislation a decade ago, their popularity has surged. Their versatility makes them suitable for businesses across a wide range of sectors, especially those with people-oriented operations. If you are considering an EOT, your industry need not be a barrier.
To establish an EOT, a business must meet certain requirements. These include:
- The company must either be a trading company or trading group.
- For capital gains tax relief, the Trust must acquire more than 50% of the share capital.
- Post completion, qualifying conditions must continue to be met for four full tax years .
- All employees must benefit from the scheme, although specific exclusions can apply for recent joiners/leavers.
- All employees must be treated equally, though there is limited scope for tiering by factors such as hours worked or earnings bandings.
Further considerations include the requirement five employees, excluding option holders, family members, or shareholders holding more than 5%, each with a minimum one-year employment prior to completion for every two owners (holding more than 5%) .
“We believe that exiting the business via EOT will make the company more resilient, bring employees closer together, strengthen our shared ethos, and allow a group vision. Having just celebrated the 10th birthday of the company, the EOT marks the start of a new chapter and Jonny and I are very excited to see what the future has in store. We want to thank Eleanor, Simon and the team at Price Bailey in supporting us in this exciting development for the business.
David Lamb, Applied Psychologies
Support throughout the whole process
At Price Bailey, we work alongside you from start to finish – and beyond – providing hands-on support to ensure a smooth transition and continued support after completion.
An EOT transaction involves multiple phases and a range of technical and practical considerations, requiring a well-coordinated approach across several disciplines and departments. Below, we have set out a very brief overview of each stage:
Phase 1: Qualification, valuation and modelling
The initial phase involves a thorough evaluation of your business’s suitability for an EOT, including whether the financial position and reporting meet the long-term obligations of the structure. Our conclusions on this are reflected within the HMRC clearance submission.
Simultaneously, our experts develop a comprehensive, long-term cash-flow forecast based on your management teams’ assumptions. This dynamic tool enables you to stress test various scenarios and supports a well-informed decision-making, while also demonstrating to HMRC that we understand how the business intends to generate cash in the future and how that cash will be used in different scenarios.
This phase concludes with a valuation exercise to understand what that the business is likely to be worth across a range of different scenarios.
Phase 2: Deal planning
Deal planning involves bringing all of the initial work together to determine how exactly a deal will work in practice. This includes what value will be realised by each party, when this may happen, and where risks may lie. The outcome is clarity on what gets paid to who and when under different scenarios and how the balances evolve over time.
This is typically where additional complexity is introduced, should it be required. This complexity can arise from matters such as de-merging non-operating property, share splits, IHT planning, share options, family matters, or the introduction of third-party funding.
Phase 3: Legal drafting and HMRC clearance
Here is where we introduce you to our network of experienced, specialist EOT lawyers. Once engaged, we work closely with legal advisers to outline drafting and key terms. We will also prepare detailed tax reports and submit statutory and non-statutory clearance applications to HMRC, including a comprehensive valuation report and supporting analysis prepared by our valuation specialists.
The trust may also take its own independent legal advice at this stage. We are happy to make introductions from our established network or to work alongside advisers already appointed.
Phase 4: Completion
Prior to completion, the trustee company will be established, trustees appointed, and the legal documentation finalised. We support both you and your legal advisers throughout this process, including addressing any hurdles arising from the complexity specific to you and your business.
Once clearance has been received and final legal terms agreed, we finalise the valuation and any loan or financing arrangements. Trustees are briefed on the final details and then legal documentation is executed, marking the transfer of ownership from the seller to the EOT.
Funds are then distributed in accordance with a detailed completion schedule we produce.
Following completion, we help with the necessary submissions to Companies House and HMRC, support you with initial corporate governance matters for the EOT, review trust accounts and register the Trust with HMRC.
Phase 5: The first year
The twelve months that follow completion will inevitably be full of a few ‘firsts’ such as Trust meetings and distributing employee bonus payments. Vendors may require advice on their tax returns, management reporting may need to evolve to reflect the new ownership structure, pre-year budget meetings may require additional few agenda items. We can provide support for all of the above and more to give the company and trust the best opportunity to succeed throughout that first year.
Our thorough process ensures that the transaction is smooth, you and your employees feel supported, and that your Company is primed for success in the long-term. We will be be your side every step of that journey.
Multi-departmental advice
One of the unique advantages of working with Price Bailey for your EOT transaction is the access you gain to multiple specialists, each contributing valuable expertise.
We can assist with associated matters in either a ‘guiding’ capacity where we help your existing providers, or an execution capacity where required.
We offer a helpdesk to cover all of the matters below for the first year after completion:
- Making the management accounts appropriate for an EOT
- Personal tax
- Payroll matters for the EO bonus
- Accounts prep and filing
- Cash flow modelling
- Board meeting governance
- Supporting with capital distribution governance
- Future share options matters
- Funding matters
- IHT and family tax matters
EOT Frequently Asked Questions
Why do I need a valuation for an EOT?
A fair value, robust valuation is essential for selling to the EOT. Our team leverages extensive valuation experience, using multiple leading databases to ensure accurate, well-supported valuations.
How much will I get paid?
This is dependent on both the company valuation and the detailed cash flow modelling, which is carried out as part of our engagement. We provide clear, realistic projections across a range of scenarios, ensuring that expectations are understood and aligned by everyone involved in the process, including trustees.
What if my employees aren’t ready?
We can support the sellers and trustees to create a succession plan to help transition management responsibilities. If required, we can also include share option schemes as part of the EOT transaction to help further incentivise the transition of responsibility. Day-to-day management doesn’t need to change immediately, allowing for a flexible adjustment period which can be up to 10 years in many cases.
How long does the process take?
The typical timeline is around 16 weeks. If third-party debt is required, this can extend by several months, though we also accommodate accelerated timelines when necessary.
Are there misconceptions about EOTs?
We have found that there are many misconceptions regarding EOTs. The most common ones include:
- The day-to-day management will change immediately: This is not true, as the pace of transition can be adapted to your management team’s readiness.
- There is an employee council requirement: An employee council isn’t mandatory, and the vast majority of EOTs do not have an employee council.
- CGT exemption permanence: A common misconception is that selling to an EOT eliminates Capital Gains Tax entirely and permanently. Historically, qualifying disposals benefited from a 100% CGT exemption, which reinforced this perception. However, under the current regime, only 50% of the gain is exempt, with the remaining 50% subject to CGT at the applicable rate.In addition, the relief claimed by the seller is conditional. If a disqualifying event occurs within the four tax years following the sale, the seller’s CGT relief can be withdrawn. Separately, any future disposal of the shares by the trust will give rise to CGT at that point, meaning the tax is not removed entirely but, in part, deferred (to the Trust).
- The Trust control day-to-day operations: The Trust has a defined set of consent and decision-making rights, agreed by all parties prior to completion. These are intentionally limited, with day-to-day management continuing to be run at the trading company level, not the Trust level.
The long-term impact of EOTs on business success
Though the data on EOTs is still developing, initial findings indicate positive outcomes. As the Company’s responsibility transitions to employees, momentum builds, driven by both shared responsibility and economic benefit. An EOT’s success aligns with the company’s performance, creating a sustainable and rewarding foundation for the future.
Why choose Price Bailey?
Our EOT credentials speak volumes. We manage 2-4 EOT cases concurrently, including straightforward transitions and complex transactions exceeding £100 million. We can tie in practical matters that sellers face including IHT and Income Tax advice, but also practical matters that your Company will face including payroll processing and advice regarding filing Trust accounts and management accounts. Our Helpdesk is available to independent Trustees, while our valuation expertise is backed by world-class data sources to help create robust submissions to HMRC.
We can help
Contact us today to find out more about how we can help you
