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Preparing for your business succession


You will have gained an appreciation of what an EOT entails from the previous page on the website.

Before you can answer the question: when are EOTs a good exit route for me, am owner manager, let us look at the tax benefits.

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 (CGT) and Inheritance Tax (IHT) that otherwise would have been due. This is a large tax break for the vendor.

  • It is due to the market value rule for CGT disposals does not apply: the disposal of shares by the current shareholder is treated as being made on a no-gain, no-loss basis.
  • This only applies to disposals where the EOT trustees gain control of the company. If for example the vendor sells 51% to the trust in one tax year and the remaining 49% several years later, only the first disposal is CGT free.
  • This saves CGT of 10% (assuming that Business Asset Disposal Relief (BADR) would otherwise apply to the gain). There is no cap to the CGT relief available, unlike with BADR which has a lifetime limit of £1million per taxpayer.
  • If a disqualifying event occurs in the year following the tax year of disposal, the exemption can be revoked for the vendor or, if the event occurs in a later year, a tax charge can be triggered for the trustees as they are deemed to have disposed of the shares and reacquired them at market value. This is a ‘dry’ tax charge as no proceeds have been realised. This can be avoided if the trust is non-UK resident. Currently, the legislation does not prevent an offshore trust from being used but this may change in future as HMRC are taking an interest in offshore EOTs. Detailed advice must be taken if the use of an offshore EOT is being considered.

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 per annum may 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).

Other points to bear in mind are:

  • Benefits must be applied equally to all employees including participator employees.
    • Where there is a group all group employees must receive a bonus.
    • This can be subject to achieving a minimum qualifying probationary period, and employees can be excluded in certain disciplinary circumstances.
  • Bonuses cannot be used to replace salary, for example via salary sacrifice.
  • Bonuses must be paid by the employer company and not the trust.
  • The limited participation requirement must be met each time a bonus is paid.

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.

Setting up an EOT

These measures apply where:

  • A person, other than a company, disposes of a controlling interest in the ordinary share capital of their company to the trustees of a settlement: an EOT.

The following requirements must be met:

  • The trading requirement: the company is a trading company or principal company of a trading group at the time of disposal and for the remainder of the tax year.
  • The EOT meets the all-employee benefit requirement at the time of disposal and for the remainder of the tax year. This means that the trust is set up for employee benefit only. There are anti-avoidance measures, for example, the trustees cannot make new trusts, or loans to employees and they cannot vary the trust.
  • The EOT must, on purchase, meet the controlling interest requirement, this means that:
    • It must hold more than 50% of the share capital of the company and be able to exercise the majority of votes in all questions affecting the company.
    • Its trustees are entitled to more than 50% of profits available to equity holders and on winding up are entitled to more than 50% of assets available to equity holders.
    • There must also be no provisions in any agreement or instrument affecting the company’s constitution or management or its shares whereby the controlling interest requirements can cease to be satisfied without the consent of the trustees.
  • Where the EOT does not meet the controlling interest requirement, (for where it does control the company see above), immediately before the beginning of the tax year in which the disposal occurs:
    • It meets the requirement at the end of that tax year.
    • If it met the requirement at an earlier time in the tax year (whether before or after the date of disposal) it continued to meet it throughout the remainder of the tax year.
  • The limited participation requirement: in the 12 months to the disposal the ratio of participators i.e. shareholders and their connected parties who are also employees/directors, to employees, does not exceed 2/5. A participator is excluded from being an eligible employee if they are entitled to more than 5% of share capital or votes in the company. This condition must also be met when tax-free bonuses are being paid (see above).
  • EOT relief has not been given on a related disposal by the seller or a person associated with them in an earlier tax year.

The selling shareholders can function as trustees. Professional third-party trustees are often appointed alongside or instead of the sellers.

Selling shares to the EOT

The shares must be sold at market value. A professional independent valuation is required that will stand up to HMRC scrutiny as it is not possible to pre-agree the valuation with HMRC. In the event that the trustees are found to have overpaid for the shares the excess will not be tax-free and will be subject to Income Tax and NIC’s (not capital gains tax). This will also potentially be a breach of trust.

IHT exemption

A disposition (transfer of cash or property) by a close company into an EOT will not be treated as a transfer of value for IHT purposes, subject to three conditions being met:

  • The company must meet the trading requirement.
  • The trust must meet the all-employee benefit requirement.
  • The trust must not meet the controlling interest requirement immediately before the beginning of the tax year in which the disposition occurs but must do so at the end of that year.

A transfer of value made by an individual of shares in a company to an EOT for the benefit of the company’s employees is exempt from IHT.

Other measures also ensure that there is no exit charge or charge if the company no longer meets one or both of the trading requirement and the controlling interest requirement.

Bonuses instead of dividends

The EOT holds shares on behalf of employees and therefore any dividends paid by the employer company become the income of the trust. In practice, EOTs will be likely to waive dividends in order to allow company reserves to re-build and thus allow for dividends to be paid to the other 49% (or less) of shareholders (which may include the original vendor(s) of the 51% interest held by the trust).

From 1 October 2014, a company that is indirectly employee controlled may pay bonuses to the employees’ income tax-free, but subject to NICs, of up to £3,600 per year provided that they have 12 months of qualifying service as employees.

For Income Tax relief:

  • All persons in relevant employment (including excluded participators) when the bonus is awarded must be eligible to participate.
  • The number of participators (including their associates) cannot exceed 40% of the total of participators and employees.
  • The employer must not be a service company, either a managed service company s.61B ITEPA 2003 or a company providing the services of its employees to persons outside the group but who, alone or together with others, has, or has in the past had, direct or indirect control of the employer or which formerly employed the employees.
  • The employee must not have given up any other form of income to receive the payment.
  • Employees must all receive bonuses on the same terms but this condition will still be met if the amount paid is based on:
    • Length of service.
    • Hours worked.
  • The scheme must not allow one group of workers (e.g. directors, those on higher salaries) to benefit from a greater bonus than everyone else.

Funding the EOT 

The EOT will need to be funded by a capital contribution from the company, unless it is an existing EBT, in order to purchase its controlling interest from outgoing shareholders. This is not tax-deductible for the company.

The trustees may be able to borrow externally.

A high street bank may be prepared to lend having regard to existing borrowings of the company. Obviously, the ability of the company to repay the loan and interest will be considered along with other lending criteria. So, do not assume this to be a given.

There are specialist lenders in the market and these borrowings may come at a price.

EOT and employee share schemes

The company may also run employee share and share option schemes in parallel to an EOT. Providing that any new share issues do not dilute the shareholding rights of the EOT below 51% the company could, therefore, issue share options under the Enterprise Management Incentive (EMI).

Is the EOT really an attractive prospect for SME owners? 

Provided that the company has:

  • At least five employees, so that it can meet the 2:5 ratio of participators to employees.
  • Enthusiastic employees who want to continue to run the business.
  • Sufficient distributable reserves to fund the purchase of a controlling interest from existing shareholders

an EOT may be an attractive full or partial exit route for shareholders who are keen to ensure that the company continues beyond their retirement.

An EOT is not a mechanism for tax avoidance. If a company has a number of employees, having an EOT will provide each employee with a tax-free bonus of £3,600 p.a. throughout the course of their employment. This can amount over time to a substantial benefit for the workforce and company.

The vendor(s) may retain up to 49% of the company’s shares and so may well continue to benefit from dividends and other benefits well into retirement. They can also continue to act as company directors.


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.

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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 40 years of experience in all forms of corporate finance across many business sectors.

Andrew was the Chair of Governors at a local school for six years retiring in December 2020 and continues to be 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.

Call today on 07860 898452

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