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In 2014 as a result of the Nuttall Report, the UK government introduced the employee ownership trust (EOT) legislation.

It encourages a genuine transfer to company employees.

The vendor’s position

To qualify for the tax incentives a controlling interest (more than 50% +1) must be sold to the trust, which holds the shares on behalf of the company’s employees. To avoid claw-back, the EOT must retain indefinitely at least a 51% controlling interest.

The shares are sold at more or less market value which requires a proper commercial valuation. The beneficiaries of the trust must exclude individuals who hold or have at some point held 5% of the company’s equity.

Provided these requirements are met, there will be tax clearances needed, the vendors will be given relief from any capital gains tax that otherwise would have been due. This is a large tax break for the vendor.

The key requirements for this new relief are very similar to those applying to the CGT relief.

So the owner sells between 50-100% of their shares to the trust. What happens to the remainder?

These can be retained and sold, over a few years, to the trust; or sold to management so as to incentivise them in driving the business. This could be achieved through an Enterprise Management Incentive (EMI).

The vendor can remain a director and director of the trustee company.

Protecting the vendor’s Position

First of all it is important to the vendor to protect their interests as far as possible. There are ways and means of doing this. As EOT’s in practice are financed by the vendor there are limitations. The company cannot be under an obligation to make payments to the trust as this would produce taxable income in the trust. Likewise, the use of a “golden share “or including in the articles of association a requirement for a special resolution on matters which might detract from profits being applied first in funding the trust, and ensuring that the vendor have effective control of the trust board.

The Employee’s position

All employees must be treated on an equitable basis.

The tax free bonus of up to £3,600 can be paid to all qualifying employees on a “same terms” basis will be exempt from income tax but no relief from National Insurance Contributions (NIC).

Bearing in mind this bonus could cause conflict between the vendor and the trustees since the vendor may prefer the money to be paid to him) may subsequently be paid annually to employees by the company.

An EOT must (and must be drafted so as):

  • Only ever allow the fund to be applied for the benefit of all eligible employees on a “same terms” basis and so that all eligible employees then receive benefit
    • May allow a 12-month qualifying period; and
    • Must exclude existing and former 5% participators and their “connected persons”
  • Not allow the creation of any trust of the fund, or making of loans or by transferring property to another settlement (except another EOT); and
  • Not include any possibility of amending the trust so as not to satisfy these requirements.

Beware: the “limited participation” requirement (s236N TCGA) must be met 12 months before, and at all times after, the sale.

It may make sense to pay dividends rather than bonuses since dividends can only be paid where there are reserves (profits) whereas bonuses can be paid where there are no reserves.

The Trustees position

Trustees can waive their entitlement to dividends.

Proper corporate governance rules must be in place while the composition of the Board of the Trustee company allows for employee representation and must have at least one independent member to avoid possible conflicts.


These notes are intended to promote discussion and debate and are not put forward by way of definitive advice and should not be relied upon without seeking further advice in relation to any specific matter.

Whilst every effort has been made to ensure the accuracy of the notes, no responsibility can be taken by the writer and Assynt Corporate Finance Limited, for the consequences of any actions taken or refrained from being taken in response to these notes.

It is recommended you seek specialist advice, from Assynt Corporate Finance Limited or another suitably qualified professional adviser, in relation to any specific client matter.

The law and HMRC practices are summarised as they are understood to have effect as at 1st May 2019.

Andrew Watkin

Andrew is the director of Assynt Corporate Finance Limited and an Accredited Member of the Association of Crowdfunding experts.

Previously a partner and head of corporate finance at Baker Watkin LLP, Andrew has more than 35 years of experience in all forms of corporate finance across many business sectors.

Andrew is also the Chair of Governors at a local school and an Assessor of Expeditions for The Duke of Edinburgh’s Award.

You can find out more and connect with Andrew over on LinkedIn.

Need Help? Contact Andrew at Assynt:

If you are serious about selling your business, contact Andrew to arrange an informal chat, in person or over the telephone to assess the options open to you.

You can also contact Andrew by email at: or by completing the form on this page.

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