Finding the right exit strategy for your business is not always easy.
Selling to a competitor could lead to job losses, and a management buyout (MBO) is not always affordable.
However, another option exists.
Employee Ownership Trusts (EOTs) allow you to sell your business to your employees via a trust, ensuring continuity while benefiting from tax advantages.
With that being said, how does it work? And with the Government planning changes to the rules, is it still a good option?
How an EOT works
- Business valuation – The company is valued to determine a fair sale price.
- Trust set-up – A new EOT is created to hold shares on behalf of employees.
- Ownership transfer – The EOT buys a controlling interest (at least 51 per cent), typically using company profits, loans, or seller financing.
- Employee benefits – Staff receive tax-free bonuses and benefit from the company’s long-term success.
What is changing?
The Finance Bill 2024-25 introduces new tax rules to clarify how distributions from a company to an EOT are treated. Under the changes, certain acquisition costs can be deducted for tax purposes, including:
- The cost of acquiring shares
- Interest on acquisition loans (at reasonable rates)
- Stamp Duty or Stamp Duty Reserve Tax
- Valuation and legal costs related to the acquisition
These changes aim to provide more certainty to businesses using EOTs, but further amendments could still be made before the Bill becomes law.
So, could an EOT be beneficial for you? Here are some reasons why.
- 100 per cent Capital Gains Tax (CGT) exemption – If you sell your business to an EOT, you pay no CGT on the proceeds.
Employee retention – EOT-owned companies can pay employees up to £3,600 per year in tax-free bonuses.
Business continuity – The company stays in the hands of employees, rather than being sold to an external buyer.
Gradual transition – Unlike an immediate trade sale, you can step back over time.
Of course, there are drawbacks to EOTs. They include:
- Delayed payment – Sellers may not receive the full value upfront, as the buyout is often financed over time.
- Financial stability needed – The business must have strong cash flow to fund the purchase.
- No direct ownership for employees – The trust holds shares, so employees do not own them outright.
If you are considering an EOT, our team can guide you through the process and help you assess whether it is the right fit for your business. Get in touch today.
