What is an Employee Ownership Trust?
An Employee ownership trust in short, is a business held on trust for the benefit of its employees. John Lewis Partnership is one of the most notably successful Employee Ownership trusts in the U.K with its employees owning 100% of the business.
The word ‘trust’ is particularly significant when it comes to the Employee Ownership Trust as employees do not have ownership of the shares directly in the business but rather the trustee holds the shares on a discretionary trust for the benefit of present and future employees. This ever changing beneficial ownership (as a result of staff turnover) is important in minimising the administrative burden otherwise associated with an employee ownership (of shares) model as this would require a constant cycle of purchasing and selling shares (on behalf of employees).
Benefits of an Employee Ownership Trust
So what are the benefits of an Employee Ownership Trust? We have summarised some of the key benefits that encompass an Employee Ownership Trust below.
It can be said that an Employee Ownership Trust promotes an inclusive culture within the workplace with each employee having a chance of profiting from the companies turn over. The trust is designed to benefit all employees equally and there is certainly something which can be gained by every employee staring their role with an equal chance to profit from the business regardless of their position and/or seniority and this is especially lucrative for those employees who previously would not have had the opportunity to earn beyond their annual salary.
Motivation and productivity
It isn’t uncommon to find a lack of motivation amongst employees particularly, those who are placed in an environment where there is a lack of incentive to work harder and maximise their working hours as, more often than not, their take home salary will remain the same. Even those employees who are privy to a company bonus scheme find that their handbooks and contracts emphasise the word ‘discretionary’ which creates a lack of confidence for those hoping to earn more.
An Employee Ownership Trust creates greater transparency for employees when it comes to their earnings as, essentially, the more profitable the business is, the more each employee is able to take home when it comes to their share of profits. This transparency creates a great culture and incentive for prospective employees to join the business, with those already employed, having an interest in remaining loyal to the business.
With an Employee Ownership Trust, business owners can anticipate higher productivity levels and motivation from their staff. An Employee ownership trust shifts the success of the company on to its employees, it is therefore no surprise that many businesses who have converted to Employee Ownership Trusts report having a lower turnover of staff, are seeing employees take less time off of work and a surge in the business profits.
A recent article has shown that Riverford, the company know for its organic vegetable boxes has recently celebrated its third anniversary as an Employee Ownership Trust. The business reported one of its best years for profit which was of course shared by its 1000 staff who each received a share of £3186. The business worked harder than ever during the pandemic with an increased demand for food deliveries but there was no report of its employees slowing down but in fact the opposite, as its employees worked harder than ever recording exceptionally low absence rates which dropped to less than 2 percent and a lower staff turnover, highlighting the individual employee motivation that can be gained in an employee trust ownership.
Future interest for employees
What is more is that, Employees can gain a sense of security working for an Employee Ownership Trust as, if the Employee Ownership Trust is sold at some point in the future, qualifying employees will share in the proceeds of sale.
Business owner incentives
Many business owners have experienced both the highs and lows of owning a business, but for many, the pandemic has made them nervous about the financial uncertainty the pandemic has and continues to cause. The Chief Executive of the Employee Ownership Association believes now is the time to ‘seize the moment’ and we couldn’t agree more, the extensive benefits for both business owners and employees make an Employee Ownership Trust worth considering.
Selling the business
Selling a business to an Employee Ownership Trust can be lucrative to business owners as, the generous tax benefits mean that the overall return to the seller is often higher than a traditional sale. This is reassuring for many business owners who perhaps feel they would not be able to sell their business for what they hoped due to the financial climate.
Whilst this may mean that a selling owner needs to stay involved in the business during any earn out period, the fact that the earn out payments are paid without any tax liability or with only minimal tax can result in a lucrative period of earnings.
For those who are not ready to withdraw from the business altogether but do wish to hand over control to their employees can do just that as, a seller can retain a shareholding so long as the Employee Ownership Trust acquires a controlling interest of 50%.
Further, completion relating to the sale tends to be quicker than a traditional sale.
There are generous tax benefits that accompany an Employee Ownership Trust, the key benefits are:
- Gains made from Company shareholders who sell a controlling interest in the Employee Ownership Trust will be exempt from Capital Gains Tax; and
- Employees are entitled to receive an income tax free annual bonus of up to £3600.00 as part of any profit share.
We do recommend that you do speak to a professional tax adviser to gain full insight in the tax benefits of an employee ownership trust.
Given the reduction in the lifetime allowances for Business Asset Disposal Relief (formerly called Entrepreneurs Relief) and the ever running political landscape in which it is envisaged that further changes to Capital Gains Tax may arise in future, Employee Ownership Trusts are becoming increasing popular.
For more information regarding Employee Ownership Trusts or if you are considering transferring to an EOT, please contact Richard Coulthard on 0113 284 5095.