Employee Ownership Trusts (EOT)

Employee Ownership Trusts (EOTs) continue to grow in popularity as a way of engaging with employees while providing an alternative exit strategy for business owners who do not want to pursue a third-party sale.

How do EOTs work?

Business owners transfer a majority stake to a trust benefiting employees, who then also enjoy a tax-free bonus of up to £3,600 each year.

Owners can receive full market value for their shares – generally via a mixture of up-front consideration from existing cash reserves and deferred consideration funded from future profits of the business.

A significant upside is that owners can sell to the EOT without incurring a capital gains tax (CGT) liability. This feature of EOTs will continue to make them popular given the reduction in the lifetime allowance for Business Asset Disposal Relief in 2020 (formerly known as Entrepreneurs’ Relief) and the much-anticipated increase to the rate of capital gains tax in 2022.

EOTs are particularly relevant to businesses where people are the key drivers of the company. They provide the opportunity to increase employee engagement and improve recruitment and retention rates and are also suitable for corporate social responsibility profiles.

When implemented carefully, there are many advantages of EOTs for shareholders, companies and their employees.

How can Moore Kingston Smith help?

As champions of EOTs, we are proud members of the Employee Ownership Association.

We offer a holistic business advisory service around EOTs encompassing tax, legal, corporate finance, HR and accounting services. Having implemented many EOTs already, we are well placed to advise you throughout the whole process: from the initial discussions to determine if it’s right for you, to supporting you with the communication of the completed transaction to your employees and the outside world.

Importantly we use the benefit of our experience to ensure a final EOT structure tailored to your specific needs. We do this via a structured consultative process with you over several meetings before legal drafting begins.

Our full range of services include the following:

Preliminary restructuring advice where required, e.g. including the incorporation of partnerships or general group restructuring.
Tax advice on whether the qualifying conditions are met and seeking clearance in advance from HMRC.
Provision of professional share valuation.
Financial modelling to give a view of how the consideration will be settled.
Corporate finance advice on possible part-funding by third-party debt financing.
Structured consultative process to tailor the EOT to your specific requirements.
Advice on the identity of the trustees and their appointment.
Advice on the establishment of an employee council.
Advice on whether new contracts of employment are required for owners.
Legal drafting of the EOT trust deed, sale and purchase agreement and ancillary documents.
Recommendations on shareholder and keyman protection policies, so they remain relevant and valid.
Assisting with structuring employee bonus model.
Assisting with communications to employees.
Post-transaction support, including accounting for EOT transactions and ongoing filing requirements.

Get in touch

Please get in touch with our team if you would like an initial discussion to explore whether an EOT might be right for you.

Case studies

White Label Recruitment Marketing Limited (“White Label”)

Moore Kingston Smith is delighted to have advised White Label on its transformation into an employee-owned company, through its sale to an Employee Ownership Trust (“EOT”).

White Label is a highly successful recruitment marketing agency that works with employers to enhance talent attraction and employee communications. White Label uses tracking and data to measure results, analyse effectiveness and build high performing marketing solutions for its clients. It has worked with a range of well-known employers, such as GlaxoSmithKline, EY and Amazon.

The company was founded in 2013 by Claire Herriott, who was its sole director and, together with other family members, owned 100% of the business. As the business grew it attracted a loyal pool of talented employees, and by 2020 Claire was keen to consider how to put in place longer-term plans to secure the future of the business. She was interested in realising the value of her ownership of the business, but was most keen to ensure the company’s culture and independence was preserved and her colleagues and employees could have a share in White Label’s future. White Label is fundamentally a people business, and the recruitment and retention of talent is key to its success.

Claire was introduced to Nicola Horton, Corporate Finance Principal, and Mike Hayes, Tax Partner at Moore Kingston Smith, who advised that sale to an EOT could meet all of Claire’s objectives. It would allow Claire to sell her stake in the business, but rather than sell to a third-party acquirer, who might have wanted to take the business in a different direction, a trust would be established to hold the shares for the benefit of all current and future employees.

Claire would no longer own the business, and going forward she would share management responsibilities with members of staff appointed to the White Label board by a newly-formed Employee Council. As an employee-owned company, White Label would be governed and operated in the employees’ best interests and would reward employees for the development and growth of the business.

Having agreed that sale to an EOT was the company’s best option, Moore Kingston Smith assembled a team of advisers to help White Label make the transition, introducing various parts of the firm at key points to keep the process moving. Our Corporate Finance team, led by Nicola Horton and Calvin Bond, advised the company on valuation and financial issues, while our Tax team, led by Mike Hayes and Shima Kelly, advised on tax clearances and how to structure the transaction effectively in order to benefit from the various tax advantages that sale to an EOT confer. Moore Kingston Smith’s legal services team, led by Partner Andrew Bloom and Vida McShane, prepared all the legal documentation governing the sale and establishing the EOT, including the sale & purchase agreement, trust deed and new articles, while our HR team drew up new director service agreements and incentive scheme rules.

The sale to the EOT completed in early January 2021 and has been welcomed by White Label’s staff who see it as a positive reflection on their contribution to the business and a great incentive to help the company grow still further. Claire believes being able to tell potential new hires that the business is employee-owned will be a significant factor in White Label’s future success.

Reflecting on her experience of working with Moore Kingston Smith, Claire Herriott said: “From my first conversation with Moore Kingston Smith it was immediately clear that I was surrounded by impressive professionals. Each member of the assembled team played an important part, and quickly became trusted advisors in the truest sense. It has been a privilege to work with them on this important evolution for my business and with the successful establishment of the EOT we have undoubtedly benefited from their combined expertise.”