Employee Ownership Trusts in the Construction Industry

Tax relief

There are other tax incentives to promote employee ownership such as the better-known Enterprise Management Incentive schemes (EMI schemes). However, shareholders who sell more than 50% of their ordinary share capital to an EOT can benefit from a complete exemption from capital gains tax (CGT) in the year in which the EOT acquires the majority holding.  This is more generous than Business Asset Disposal Relief (formerly known as Entrepreneurs Relief) and is without the £1m lifetime cap. 

The selling shareholders and their connected persons must not have made a disposal of shares that qualified for this relief in a previous tax year. Therefore, in practice, shareholders are incentivised to see 100% of their shares to the EOT, as any unsold shares would not qualify for a 100% CGT exemption on a later sale. In addition to the CGT relief, the disposal of the shares into the EOT will be exempt from inheritance tax charges.

A further incentive is the ability to pay tax free bonuses to employees.  Employees of a company controlled by an EOT have been able to benefit from an income tax exemption on bonus payments of up to £3,600; this payment must be a bonus payment, not part of regular salary or wages. All employees with at least 12 months service must be entitled to benefit from the bonus award, but the company will have discretion to set the bonus by reference to a percentage of salary, length of service or hours worked.

Administration of the Trust

Each EOT will have a group of Trustees, usually comprising of representatives of the Directors of the business, employees and often an external, independent Chair.  The Trustees hold assets in the EOT for the benefit of the employees who are the ultimate beneficiaries of the Trust. 

Each EOT will have its constitution outlined in a Trust Deed.  In some cases, the Trust Deed is also used to define the future of the business.  For example, it could protect the business from asset stripping, or ensure the longevity of the employee ownership by stipulating that the interests of future employees are considered alongside those of present ones. 

Paying shareholdings

The EOT would repay the selling shareholders over a period of years. Often referred to as ‘deferred payments’, these payments are funded by the trading company (existing business). A price for the selling shareholders must be determined via a formal and independent valuation of the business. The company may be able to pay the shareholders out of future profits and may consider on taking on external debt to finance the transaction.  Ultimately, there is a level of flexibility in the structure that would not always be available when selling to a third party. 

Hybrid model

Many companies find that a hybrid model which combines direct and indirect share ownership provides the best solution.  An EOT will often hold most of the shares in order to ensure stability of ownership in the company.  A tax efficient share scheme such as a Share Incentive Plan (SIP) or EMI option scheme may then be used to distribute the remaining shares to the employees. 

In a hybrid model, those individuals who own shares directly may receive additional income by way of any dividends declared on their shares and may make capital gains if they sell them. 

At the same time, an EOT ensures that whilst individual shareholders may be interested in their own benefits there is also focus on the long term.  All employees, present and future, can share in success regardless of their personal ability to purchase shares because they are beneficiaries of the EOT.  They can still also receive direct monetary reward for corporate or personal success through mechanisms such as bonus payments.

How we can help

If you would like more information on EOTS, hybrid ownership structures and how they may work in your business, please contact Shriya Dheir. 

Buzzacott LLP can assist with independent valuations and provide tax advice and support on employee ownership structures.