Employee Ownership Trust Explained - How does it all work?

An Employee Ownership Trust is a government-backed business ownership model where a trust owns a controlling stake in a company on behalf of all its employees.

There are several benefits to Employee Ownership Trusts as a business ownership model, including generous tax relief for the selling shareholders, tax incentives for staff, and a variety of practical business advantages.

But how does an Employee Ownership Trust work exactly?

Employee Ownership Trusts – In a nutshell

Employee Ownership Trusts (or “EOTs”) enable a company to become owned by its employees.

A trust is set up by the existing owners of the business for the benefit of all employees. The trust then becomes the majority business owner, usually as part of an existing shareholder’s exit or succession planning strategy.

The price agreed for the controlling stake will be market value, based on independent assessment.

How does an Employee Ownership Trust work for employees?

Employees working at a company owned by an Employee Ownership Trust are entitled to tax-free annual bonuses of up to £3,600. An EOT must be for the benefit of all employees.

Once the previous shareholders have been wholly remunerated for their shares, all employees will collectively receive the full economic benefits that shareholders would generally accrue.

• Read more: Is an Employee Ownership Trust good for employees? 

What about new employees?

New employees automatically benefit from the EOT, while employees who leave the company will automatically cease to benefit. This is helpful because it ensures a simple and enduring ownership structure.

How does an Employee Ownership Trust impact senior management?

In companies owned by an EOT, senior management will often be given additional benefits beyond those from standard EOT membership to ensure they are appropriately incentivised. This could include direct minority equity stakes or share options.

How will the business be managed after sale to an Employee Ownership Trust?

It is important to remember that it is not the Employee Ownership Trust’s, nor its trustees’ role to run a trading company. The role of the trustee is to ensure the trust’s assets are well managed and that the trust runs in accordance with its values.

Like with any business, management and leadership is the role of senior management.

Selling/Retiring Shareholders

For this reason, it is often encouraged for selling shareholders, who were previously company directors or other senior managers, to remain involved in day-to-day management for a while afterwards.

This way, they can ensure the company continues to run smoothly and protect the assets for the trust while leadership succession is implemented over time.

It is also possible for a retiring shareholder to retain a minority stake in the business, which can be purchased by the company or the Employee Ownership Trust later.