Introduced in the Finance Act by the government in 2014,... ...
Employee Ownership Trusts... How you can create a LASTING LEGACY
13 January 2021
Last month, at the end of the most turbulent and unsettling of years for most, if not all businesses operating within the Creative Industries, the leaders of creative agency Quiet Storm, celebrated its 25th anniversary and announced they were moving the agency into an Employee Ownership Trust (EOT). This follows design agency, Emperor, adopting this vehicle for their own business earlier in the year with others having done similar, including leading creative pitch consultancy AAR.
So, what exactly is an EOT and more importantly what appeal does it hold for businesses and their teams?
Employee ownership trusts explained
An EOT’s an indirect form of employee ownership that sees a trust hold a controlling stake of at least 51% of a company on behalf of eligible employees. EOTs were brought in by the government in 2014 to encourage staff ownership as a business model.
The model can be seen as a means to drive collective entrepreneurialism and innovation across a business where the whole workforce can benefit from the success. Equally, and one that supports the notion of legacy and sustainability, it allows a company to be passed onto the next generation of leaders.
In doing so, businesses can preserve their identity, integrity and values through a consistent means with true longevity. Whereas historically the creative industries have seen high levels of transactional M&A activity, perhaps this model offers an alternative route to exit for agency and creative business owners looking to preserve their business through rewarding their key asset, the very people that sit within the company.
what are the Benefits?
Beyond the collective mindset engaged through the EOT, with all employees now actively a more meaningful part of the business, there’s a clear financial upside to implementing this model.
For business owners it creates two tax breaks:
1. Those making a qualifying sale of shares to an EOT may do so free of Capital Gains Tax.
2. Once a company’s owned by an EOT, it can pay annual bonuses of up to £3,600 per annum to each of its employees free of income tax.
There are many conditions that need to be fulfilled in order to qualify for the tax breaks, with the two main points being:
1. The EOT must acquire more than 50% of the shares in the company.
2. If employees receive any benefit from the EOT, they must all be included, and on the same terms.
For those creative business owners who make this decision, it offers the opportunity to slightly step back from the day-to-day, gaining more breathing space and time, and allowing their team across the business to now also benefit from any future success.
- It enables owners to realise a substantial amount of the value of their shares without incurring any Capital Gains Tax liabilities.
- It allows the sale proceeds to be funded out of future company profits and prevents the need for external (bank) funding (although third party funding’s a viable option in many cases).
- Importantly, it protects the jobs of the employees and provides a real incentive to them in the knowledge that the company’s now employee owned and has the potential to pay annual tax-free bonuses (capped as illustrated).
- It enables the sellers to take a phased withdrawal, giving them the opportunity to upskill the management team, thereby giving the company the best chance of future success.
And finally, it provides the owners the opportunity, in the future, to focus more of their time on other business interests, or just retirement!