Tried And Tested: Employee-Ownership Trusts

Key points

What is the issue? Employee-ownership trusts are primarily a neat succession solution but can work in start-ups and at other stages in the business life cycle. What does it mean to me? Employee ownership particularly comes to the fore in business successions. This is why the government has introduced the new EOT CGT exemption. What can I take away? Employee ownership can produce better business outcomes as well as a great place to work. Employee-ownership trusts (EOTs) provide a refreshingly different ownership model for private companies. Anyone who focuses on the tax savings achievable through the new EOT tax exemptions is missing the big picture: employee ownership can produce better business outcomes as well as a great place to work.

EOTs are primarily a neat succession solution but can work in start-ups and at other stages in the business life cycle. Advisers need to rethink their answers to some standard questions from clients, such as what ways are there to sell my company?

Employee trusts are a proven succession solution

The usual succession solutions for owners of a company include a Stock Exchange listing, a trade sale or a sale to private equity, including a management buyout. Many businesses have made a different solution work well: a sale to all staff organised through an employee trust.

Wilkin & Sons (Tiptree jams) moved to employee trust ownership in the 1980s as did Donald Insall & Associates (conservation architects). There are other longer-established companies owned by employee trusts such as Arup, Swann Morton and the John Lewis Partnership. The Employee Ownership Association has more examples on its website.

The employee trust model is clearly tried and tested. Research also supports employee ownership as providing a 'winwin' business model; one that is good for the business itself and for its employees (see Chapter 2 in the Nuttall Review of Employee Ownership (BIS 2012) ('Nuttall Review')). Notwithstanding these success stories and academic support, until recently there has remained a stubborn lack of awareness of this ownership model across the business community.

Nuttall Review

In 2012 the Deputy Prime Minister, Nick Clegg, announced the government's aim of putting employee ownership in the bloodstream of the UK economy. The government commissioned the Nuttall Review and subsequently endorsed its definition of employee ownership (see Table 1) and measures to help establish employee ownership, in all its forms, in the mainstream of the UK economy. In particular, following the findings of Nuttall, the government introduced new tax exemptions to support employee trusts. The aim of these measures is, primarily, to raise awareness of the trust model of employee ownership. These exemptions also help the financing of employee trust owned companies and to simplify this business model. The idea is that the tax exemptions will encourage owners and advisers to break with convention and adopt EOTs as a private company ownership model. For more on the Nuttall Review click here.

Table 1 - Nuttal Review definition of employee ownership 'Employee ownership - means a significant and meaningful stake in a business for all its employees. If this is achieved a company has employee ownership: it has employee owners. What is 'meaningful' goes beyond financial participation. The employees' stake must underpin organisational structures that ensure employee engagement. In this way employee ownership can be seen as a business model in its own right.' EOTs

The...