Introduced by the UK government as part of the 2014 Finance Act, EOTs are a special form of employee benefit trust created to encourage more companies to become employee owned, as exemplified by department store John Lewis. There is strong evidence that employee ownership is generally linked to better productivity and therefore a more robust, better performing national economy.
To qualify, shareholders must sell more that 50% of their holding directly to the EOT. As an incentive to encourage company owners to utilise EOTs, the government introduced generous tax breaks for shareholders, exempting them from capital gains tax on their share sale. However, aside from the benefits for shareholders selling to an EOT, there are also a number of practical benefits of transferring to an EOT for both the company and employees. These include:
- Higher levels of employee engagement and commitment
Employee ownership models create strong platforms for the growth and success of a business and are proven to improve engagement and employee retention.
- Employee annual bonuses free of income tax
Employees can receive up to £3,600 in annual bonuses that is not subject to income tax.
- Improved business performance
Aligning the interests of companies and employees can make companies focus more on the long-term and secure more sustainable growth with an engaged and committed workforce.
- Culture of the business doesn't fundamentally change
There is no major shift in how the company is run and what is expected from employees, meaning little or no disruption to service and clients.
- The company is not embroiled in a takeover saga
Owners do not have to go through the pain of negotiation and face the legal costs of agreeing the terms of selling their business and consequent resentment from staff. They can also continue with the business on a wind down basis rather than being forced to leave.
- Employees can share in the growth and success of the company
EOTs have been shown to drive continued innovation and productivity. This increases the business value and therefore increases employees' share value.
- Secures the future of a company when other succession options unavailable
EOTs provide the outgoing business owners with a viable option for succession.
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