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Caring is sharing: The growing popularity of Employee Ownership Trusts

There has been a significant rise in the number of businesses transferring ownership to employees through Employee Ownership Trusts (EOTs).

Set up by the Government in 2014, EOTs allow owners to sell their shares to employees via a trust company – normally for full market value – without income tax, capital gains tax or inheritance tax liabilities.

The model is particularly suited to owners who want to withdraw gradually from their business. There is typically an upfront payment for the shares, and the remainder is paid from profits from the business over an established period, usually a few years.

In 2019, the number of businesses using EOTs was 127. By last year, it had more than trebled to 384.

“EOTs are not only a highly tax-efficient way to exit a business but, increasingly, they are being used as a key component of a recruitment and retention strategy,” said Cormac Marum, Head of Tax Advisory at Harwood Hutton.

“By giving management and staff a stake in the business, an owner can have greater confidence they will stay motivated and buy in to the future direction and goals.

“So it’s an excellent option for attracting the right kind of people and keeping them focussed on performance. It also allows those who have helped grow the business to share in its future success.”

Adam Stronach, Harwood Hutton’s Head of Corporate Finance, said as well as the tax advantages, there was less need for the lengthy due diligence processes that come when selling to an external party, so professional fees tend to be lower. The risk of a deal collapsing due to disagreements between vendor and purchaser is also greatly reduced.

Some well-known companies have embraced the employee share ownership model. They include Richer Sounds, the home entertainment retailer, Riverford Organic Farmers and publisher the Folio Society.

If you are interested in exploring Employee Ownership Trusts for your business, contact Adam Stronach on 01494 739500 or write to adamstronach@harwoodhutton.co.uk

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