Construction & Built Environment Sector - EOT activity

16 September 2021

Fanny Garrigues

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Introduced in the Finance Act by the government in 2014, following the Nuttall Review of 2012, Employee Ownership Trusts ‘EOTs’ aim to encourage business owners to sell their shares into a Trust, held on behalf of the employees of a company. In essence, it’s a means by which employees can feel more connected to their business, whilst offering a tax incentive to encourage the owners to sell.

In 2019, EOTs employed 23,000 people across the UK. The structure’s becoming increasingly popular mainly due to both the tax and employee benefits. As long as the Trust owns more than 50% of the trading company, all non-related employees with less than 5% capital ownership will benefit from the structure and be treated equally, subject to a pre-determined point system.


SECTOR ACTIVITY

In the Construction & Built environment sector, Erith Construction was one of the first to make the jump and move to an EOT as early as November 2016.

EOTs seem to be particularly popular with architect practices with 25% of the AJ100 firms owned by their employees, highlighting that this sector’s a clear fit for such a modelling.

In March 2021, AJ100 Employer of the Year HLM Architects revealed 100% of their shareholding has been transferred to an Employee Ownership Trust for the benefit of their employees. Chair Richard O’Neil commenting ‘The Trust enables everyone to play an even bigger role in shaping the future of our practice and share in our collective success. Our employee ownership’s far more than just a business model. It’s about creating a place where we can continue to channel ideas, be truly innovative and find solutions’.

Even more recently in May 2021, top 15 AJ100 firm Purcell also revealed they’d sold to an EOT for the benefit of their workforce of around 250.

In March 2021, Readie Construction announced its decision to sell to an EOT, with the decision driven by a strong desire to preserve the legacy of the brand. Whilst the main board of directors and senior management remain unchanged, a new EOT Board will be formed. This traditionally includes a director, an independent trustee and one employee representative.

BENEFITS

The benefits of an EOT are vast, both culturally and tax-wise. Involving the employees in the business has proven to make them more motivated and productive (various studies have shown this to be true). As they play a bigger part in the company, a mental change happens and staff become more entrepreneurial, wanting to contribute to the firm’s success. Companies become more successful, profitable and sustainable, enjoying higher staff retention and attractiveness.

The company may also pay bonuses of up to £3,600 to each eligible employee per year, free from income tax.

When the business owners sell to the EOT they get a full Capital Gains Tax exemption, but only on the first disposal of their shares (if they undertake several transactions). This will be of particular interest to shareholders who may not benefit from Business Asset Disposal Relief especially in the context of an anticipated rise in UK capital gains tax.

A share disposal to an Employee Ownership Trust’s generally a smooth process, with less third parties involved during the transaction, meaning potentially lower fees and a quicker outcome than a trade sale for example.

CONSIDER ALL OPTIONS

Selling to an Employment Ownership Trust could work for you if you’re considering retirement plans, and you don’t feel a trade sale or conventional management buy-out would be suitable.

Small companies and large companies are equally eligible, however the most successful transactions involve companies that are profitable and have good future prospects.

If you’re interested in hearing more about EOTs and understand how they’re valued compared to other exit options, then don’t hesitate to contact a member of the Corporate Finance team at Fortus and we’ll be pleased to assist, advise and review your plans.

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