UK: Neat: Employee Ownership Trusts As The Perfect Succession Solution

Last Updated: 20 October 2014
Article by Graeme Nuttall

Too many owner managers have overlooked employee ownership as a business succession solution. New tax exemptions should ensure that the indirect employee ownership business model achieves the recognition it deserves: one that provides a neat exit that is good for a business; good for employees and good for the UK economy.

Employee ownership (EO) is a great idea

EO is a great idea. EO delivers a significant and meaningful stake in a business to all employees. Employee-owned businesses are conventionally managed, successful businesses in which employees enjoy working and which deliver wider benefits. The lifespan of companies with EO is impressive. EO is an adaptable concept and whatever the business or the stage a business has reached EO can work well. It works particularly well as a succession solution.

Unfortunately, many professional advisers have not yet grasped the potential of EO. Advisers know how to implement employees' share schemes including establishing employee benefit trusts (EBTs), (typically offshore) as warehouses or market makers. But there has been an emphasis on delivering equity incentives to a select few executives and, even if an all employee plan is implemented, this has been more about delivering tax-efficient pay rather than improving employee engagement. Employee share ownership arrangements can work very well but tend to be add-ons to the standard corporate business model: not business models in their own right. It may be that an executive share plan or an all employee share incentive plan (SIP) is all that is needed by a particular business. But for an increasing number of private companies in the UK, something else is needed and that something else is EO.

Politicians leading the way

Politicians are often accused of being reactive. In relation to EO they are leading the way. UK governments have previously supported EO in transforming public services. Minister for the Cabinet Office and Paymaster General Francis Maude has championed EO as a driver of higher productivity, effort and innovation for public services by encouraging public sector workers to form employee-owned businesses. Deputy Prime Minister Nick Clegg decided to take that message to the whole UK economy. He announced in January 2012 that he wanted EO in the bloodstream of the economy.

The essence of EO is that those employed in a business can genuinely say, as a group, 'we have a stake in this business' or as Nick Clegg put it: 'we are talking about a big chunk of the company belonging to a significant number of staff'. The employees' stake can vary but the flagship UK companies that embrace EO are all 100% employee owned companies: John Lewis Partnership PLC; Arup Group Ltd; the Scott Bader Commonwealth and Swann Morton and many other companies across many sectors.

Economic benefits

Sharing Success: The Nuttall Review of EO (BIS, 2012) summarised research on employee share ownership and EO. It is easy to see why politicians are prepared to support EO. There are better business outcomes with EO:

  • better business performance;

  • increased economic resilience;

  • greater employee commitment and engagement;

  • improved innovation;

and what is particularly important is that these better business outcomes can be achieved alongside promoting happier staff through:

  • enhancing employee wellbeing; and

  • reducing absenteeism.

Types of EO

The Nuttall Review contains a definition of EO:

... employee ownership means a significant and meaningful stake in a business for all its employees... what is 'meaningful' goes beyond financial participation. The employee's stake must underpin organisational structures that promote employee engagement in the company...

The employees' stake could be held individually by employees or held, on their behalf, through a trust. In some cases a hybrid model is used in which, say, a controlling stake is held by a trust with an internal share market operating so that employees may also benefit from direct share ownership.

Instead of incentivising a select few through equity incentives, all employees are incentivised. Instead of offering incentives over only a small proportion of shares, as often happens through traditional employee share schemes, the employees together have a significant and possibly a controlling stake and that stake underpins employee engagement.

Employee engagement

Employee engagement has its usual meaning. Engaging for success (BIS, 2009) summarised the key drivers of employee engagement as:

  • leadership which ensures a strong, transparent and explicit organisational culture;

  • engaging managers who offer clarity, appreciation of employees' effort and contribution;

  • employees feeling they are able to voice their ideas and be listened to; and

  • a belief among employees that the organisation lives its values.

There are companies with good employee engagement where employees have no or insignificant shareholdings. What is different with EO is that there is an organisational integrity to all of the normal employee engagement drivers. Employees feel able to voice their ideas because it is their company: they know their ideas will be listened to.

Employees have financial participation, but EO also provides individual employee participation and an ownership culture encompassing what academics call a collective voice.

EO as a succession solution

The message is simple: EO provides a solution that is good for any business, in whatever sector it operates, of whatever size and at every stage of the business life cycle. EO often comes about as a business succession solution.

Consequently, if the existing owners of a business want a succession solution they should consider EO. Tiptree Jams is no longer a wholly family owned business: over time shareholders have sold a controlling stake to an EBT. Parfett's cash and carry business is now majority owned by an EBT. The family sold a controlling stake to the EBT as a succession solution. This year Arrowfield Veterinary Practice Ltd became a 100% EBT owned vets practice, after buying out the practice from its owner.

A neat exit

EO can have clear advantages over alternative exit strategies. Better than a trade sale to, say, a life long competitor. Better than re-shaping the business so that it is suitable for a stock market listing. More attractive than the idea that the business could, over a period of time, be wound down and all staff made redundant. A management buy out might have potential but why sell to a few when the sale could be to all staff? Why not implement an employee buy-out (EBO)?

An EBO has a number of attractions:

  • the terms of the EBO are, to a great extent, within the owners' control. Owners can plan in advance as to when and how the EBO occurs. This is a significant advantage over most other forms of exit;

  • EBOs have a good record of succeeding. This is important if there is any deferred consideration. And most founders of a business want to see their business survive and prosper; and

  • an EBO avoids some of the difficulties that arise with other forms of exit. It avoids, for example, the commercial risk of disclosing confidential information to potential trade buyers.

Some owners prefer an EBO because:

  • an EBO is a way of recognising the contribution employees have made to the success of the business;

  • continuity of the business can be achieved for customers and suppliers;

  • it can avoid the dismissal of employees or the closure of premises that often occurs following a trade sale; and

  • the way the business is carried on, its ethos, is more likely to continue intact.

The trust model

The main area where there is likely to be a gap in know-how for advisers is in relation to the trust model of EO (also referred to as indirect EO). Many advisers are used to using EBTs for remuneration planning and the UK government has taken a number of measures to counteract what it considers unacceptable uses of EBTs. The focus of advisers has been so skewed over recent years they have forgotten that an EBT has a sound commercial use, which is acceptable to HMRC, as a trusted long term owner of shares in a company for the benefit of all its employees.

Most EBOs are implemented by using a trust because this is simpler than co-ordinating a sale to employees individually. The new tax exemptions described below will reinforce this as the method of choice for EBOs.

Government action to support indirect EO

A range of government measures has promoted EO. In relation to indirect EO, in particular:

  • there is a tool kit for employee trust ownership on the website;

  • HMRC has published accompanying guidance on tax issues to consider, and

  • Chancellor George Osborne's Autumn Statement 2013 speech confirmed that:

... the government will introduce a package of tax reliefs to support the employee ownership sector.

and, in particular, new tax exemptions to promote the employee trust ownership of companies.

New tax exemptions

The government has introduced tax reliefs to encourage, promote and support indirect EO.

  • from 6 April 2014 there is an exemption from capital gains tax (CGT) on gains on certain disposals of shares in a trading company (or in a holding company of a trading group) that provide an employee-ownership trust (EOT) (as defined) with a controlling interest in that company (the 'CGT exemption'); and

  • from 1 October 2014 there will be an exemption from income tax (but not national insurance contributions (NICs)) of £3,600 per employee per tax year for certain bonus payments made to employees of a company (or group) where an EOT has a controlling interest (the 'income tax exemption').

CGT exemption

The CGT exemption should attract attention to EBOs as a succession solution. Instead of a sale of shares being taxed typically, for owner managers, at an effective rate of 10% (after entrepreneur's relief (ER)) there is an unlimited exemption from CGT.

In contrast to ER there are few qualifying requirements on the part of the vendor. The details of the CGT exemption are contained in Part 1 of Schedule 37 of the Finance Act 2014, which received Royal Assent on 17 July 2014. A brief overview of the CGT exemption is as follows, it:

  • cannot be claimed by companies;

  • applies only to ordinary share capital;

  • has to be claimed (the requirements are straightforward);

  • in effect transfers the potential CGT liability to the trustee;

  • only applies when the relevant shares are in a company (C) which is a trading company (or principal of a trading group);

  • requires an employee trust that meets an 'all-employee benefit requirement' (ie an EOT);

  • requires the EOT to meet a 'controlling-interest requirement' (see Table 1 below) for the first time;

  • only applies to disposals in the tax year in which the controlling interest requirement is acquired for the first (and only) time;

  • needs a 'limited participation requirement' to be met to ensure that there is a sufficient change in ownership; and

  • involves potential disqualifying events that could trigger a CGT liability on the trustee of the EOT in certain circumstances.

Table 1: Section 236M(I)

(1) A settlement meets the controlling interest requirement if:

(a) the trustees —

(i) hold more than 50% of the ordinary share capital of C, and

(ii) have powers of voting on all questions affecting C as a whole which, if exercised, would yield a majority of the votes capable of being exercised on them,

(b) the trustees are entitled to more than 50% of the profits available for distribution to the equity holders of C,

(c) the trustees would be entitled, on a winding up of C, to more than 50% of the assets of C available for distribution to equity holders, and

(d) there are no provisions in any agreement or instrument affecting C's constitution or management or its shares or securities whereby the condition in paragraph (a), (b) or (c) can cease to be satisfied without the consent of the trustees.

Income tax exemption

EOTs also enable employees to benefit from an income tax exemption. The details of the income tax exemption are currently set out in Part 2 of Schedule 37. A brief overview of the income tax exemption is as follows, it:

  • only applies where C is a trading company (or principal of a trading group) for (normally) 12 months prior to making qualifying bonus payments;

  • requires an employee trust that meets an all-employee benefit requirement (ie an EOT) (see Table 2 below) for (normally) 12 months prior to making qualifying bonus payments;

  • requires the EOT to meet the controlling-interest requirement for (normally) 12 months prior to making qualifying bonus payments;

  • limits the amount each employee may receive income tax free in a tax year to £3,600 (with NICs liabilities remaining in place);

  • does not apply to regular salary payments (and salary waiver arrangements);

  • requires all employees in relevant employment to be eligible to participate (with a possible exception for recent joiners);

  • requires everyone who does participate to do so on same terms (as defined); and

  • has an exception for payments by service companies (as defined) eg that provide staff services outside C's group.

Table 2: Section 236J(I)

A settlement meets the all-employee benefit requirement if the trusts of the settlement:

(a) do not permit any of the settled property to be applied, at any time, otherwise than for the benefit of all the eligible employees on the same terms,

(b) do not permit the trustees at any time to apply any of the settled property —

(i) by creating a trust, or

(ii) by transferring property to the trustees of any settlement other than by an authorised transfer [which is effectively a transfer to a trust which itself will be an EOT immediately after the transfer],

(c) do not permit the trustees at any time to make loans to beneficiaries of the trusts, and

(d) do not permit the trustees or any other person at any time to amend the trusts in a way such that the amended trusts would not comply with one or more of paragraphs (a) to (c).


It is the EOT and the all-employee benefit requirement that is at the centre of obtaining these new tax exemptions. An EBT will typically satisfy the requirements of s86 Inheritance Tax Act 1984 (s86) (ie it will be a 'section 86 trust'). An EOT is more restrictively defined. Nevertheless there are similarities between a s86 trust and an EOT that provide a familiar starting point:

  • the ability to retain settled property indefinitely without distributing it;

  • the scope for the trustee to consult beneficiaries before the trustee exercises the votes on shares it holds or makes other decisions; and

  • the ability to include charity as a beneficiary.

But much of the flexibility usually built into an EBT has to be abandoned when drafting an EOT. The signs are that, in the context of indirect EO, these extra restrictions work well. Once shares have been sold into the EOT, the idea is that they stay there. The all-employee benefit requirement has to be understood in this context.

The all-employee benefit requirement

The following is a summary of some of the key differences between a s86 trust and an EOT as a result of the all-employee benefit requirement and why the EO sector considers them acceptable (references are to new sections in the Taxation of Chargeable Gains Act 1992 as introduced by the Finance Act 2014.):

  • Anyone employed by C or C's group must be an 'eligible employee' (although this does not include an excluded participator (as defined) (S236J(1)(a) and (3)).

    This is a significant difference from the 'all or most' requirement under s86. In practice, this change fits in with the indirect EO model because:

    • the trustee will take all employees into account when making decisions;

    • if there is distributable income, the default position is usually that all employees should benefit, and

    • if the controlling interest is sold then the default position is again usually that all employees should benefit.

  • Settled property must be applied 'on the same terms' (s236J(1)(a) and 236K).

This requirement is known as the 'equality requirement'. In contrast to s86 trusts where a trustee may make a distribution on bespoke terms to a selected beneficiary, an EOT operates similarly to a SIP. SIPs are well known as a method of achieving direct EO and so this requirement is accepted as appropriate for indirect EO structures. The equality requirement permits differing amounts to be paid to eligible employees but not so that some employees receive nothing at all. An individual's benefit from the EOT may be computed by reference to their remuneration, length of service, or hours worked, but entitlement on account of each factor must be computed separately and the total payment must be the sum of such relevant components.

A key point to appreciate is that the EOT may never actually make any payments to employees. It is the relevant employing company that will do this.

  • The trustee must not be permitted, at any time, to make loans to beneficiaries of the EOT (s236J(1)(c)).

    This is another material difference from a s86 trust. Interest free and other loans to (selected) employees who are beneficiaries would not infringe the provisions of s86. But again in an indirect EO structure, in practice, if any employee requires a loan this is typically made by the employing company (eg a season ticket or hardship loan) and does not have to be made by the trustee.

  • An excluded participator cannot benefit at all from the application of settled property (s236J(1)(a) and (3)-(6)).

    This is a significant change. If C is a close company then certain beneficiaries are usually excluded under a s86 trust although typically the excluded participators are allowed to benefit from payments subject to income tax. Again, this extra restriction appears acceptable. It ties in with the practice that some excluded participators voluntarily agree to be excluded completely as beneficiaries from s86 trusts in order to demonstrate to employees and HMRC that there is a genuine change in ownership.

  • Persons of a class defined by reference to marriage to or civil partnership with, or relationship to, or dependence on employees (or former employees) cannot be among the main beneficiaries of settled property in the EOT (s236J(1)(a)).

    This is a significant change. Spouses, children, etc of employees and former employees may benefit under s86 trusts, and may be included either in the same main class of beneficiaries as employees or they may benefit from over-riding powers of the trustee. This is another change which appears acceptable as part of an indirect EO structure because, in practice, current employees are the sole main beneficiaries in indirect EO structures and a wider class of beneficiaries is not needed.

Neat, neat, neat

This article provides an introduction to EO, EBOs and the new tax exemptions that encourage the use of EOTs and indirect EO.

EOTs will deliver benefits to selling shareholders, the employees that work in the company or group controlled by the EOT and should help the UK economy by creating successful long-lasting businesses. Just as EOTs need to be placed in context, as trusts designed to own shares indefinitely, so it is important to understand the role of the new tax exemptions.

The CGT exemption will raise awareness of EBOs as a succession solution. It is hoped that the relatively small tax differential between paying CGT at 10% on conventional exits and paying no CGT on a sale to an EOT will mean that tax does not become the main lever to promote EO. Instead the business case for EO should remain the main lever: better business outcomes, happier staff and a stronger more resilient economy.

Also the income tax exemption is about achieving fairness between indirect and direct EO. As a result of the income tax exemption, EOT controlled companies will have an alternative to establishing a SIP, and using shares to make income tax free awards to staff: they may now pay income tax free bonuses to staff without detracting from their indirect EO structure.

Given the recent political support for EO this article concludes with an extract from the Robert Oakeshott Memorial Lecture given by Nick Clegg on 27 March 2013:

Too many businesses fail at the point of succession or soon after. Business owners can be faced with the unsettling task of handing their business on to new owners without knowing what those owners will do with the business they have cherished. Many end up selling to the investor who has the largest cheque book, but little regard for the traditions, employees and customers of the firm. Others hand the business on to their children even if that isn't what they or their children really want. What we want to encourage is for more owners to sell the business on to those people who know the business inside out, who will go the extra mile, the wider family who have worked to build it up and contribute to its success – in other words, the employees.

Article first appeared in Trusts and Estates Law & Tax Journal, September 2014,

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.