Should you consider an Employee Share Ownership Trust?
Chris Downing, Director

We are finding that many clients are asking about succession planning for their business and something they have heard mentioned is an Employee Share Ownership Trust (ESOT).

Below is a very high level summary of something that has a lot of intricate moving parts!

What is an Employee Share Ownership Trust?

As the name would suggest, it is a trust set up for the purpose of owning shares in the company, on behalf of employees.

When would you use an Employee Share Ownership Trust?

If you have no market to crystalise the value of the business. Perhaps there are no interested buyers and as an owner, you would like to leave the business. Or you would like to create an incentive for rewarding employees, by settling some of your shares into the trust.

It would be possible to create something like the John Lewis model, with employee ownership of the business. It can also incentivise employees to perform well and receive a share of the company for doing so.

The company would contribute cash to the trust to enable it to purchase the shares.

What are the benefits of an Employee Share Ownership Trust?

  • The shares you settle to the trust can be settled tax free, with any sale consideration paid by the trust, from contributions made by the company.
  • The tax free status on settling the shares can be useful if you have used your lifetime £1m allowance for paying 10% on capital gains.
  • A long term incentive plan for the whole team.
  • You can retain some shares, with a maximum of 49% being retained.

What are the pitfalls of an Employee Share Ownership Trust?

  • You need to give up at least 51% of your shares for certain tax exemptions, losing control of your company.
  • A board of trustees is needed to administer the trust.
  • It needs to be open to all – not just certain individuals.
  • Can be expensive to implement.
  • Tax consequences for the employees who benefit from the shares.

Overall, they can be useful for a wider team incentive. If you are looking to operate a share plan for one or two individuals, there may be better alternatives.

Hopefully that gives some guidance and clarification, but if you wanted to know more, please do get in touch and our specialist tax team will be pleased to help you.

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