The number of UK businesses transitioning to employee ownership trusts (EOTs) has surged by 27% over the past year.
According to a new report by accountancy firm Lubbock Fine, as of the end of 2023, 542 businesses had transferred ownership to employees via EOTs, up from 428 the previous year.
The EOT model, which allows business owners to sell their company to employees through a trust, has seen exponential growth in the past five years. In 2018, only 19 businesses used EOTs, marking a 2,750% increase by 2023.
The model was introduced by the Conservative government in 2014 to promote employee ownership, with high-profile examples such as Richer Sounds embracing this structure when its owner, Julian Richer, transferred ownership to staff in 2019.
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The structure is particularly appealing to business owners who want to preserve the company’s culture and reward loyal employees.
By handing over ownership to staff, many entrepreneurs feel they are safeguarding the values and ethos of the company, rather than risking significant changes from external buyers. Financial benefits also exist for employees, who gain a stake in the business and potentially share in its profitability.
However, the appeal of the model is also very much to do with their tax advantages for owners. Mark Turner, partner at Lubbock Fine, says moving to the model is particularly suitable for owners who want to exit while ensuring the business stays in trusted hands.
He said EOTs allowed owners to sell their shares for full market value, often financed from future profits, without incurring income, capital gains tax (CGT), or inheritance tax, which can be a significant advantage compared to private equity deals.
EOTs are expected to become an even more attractive option for entrepreneurs if this month’s Budget introduces higher CGT rates. Turner said: “Any increase in CGT would likely accelerate the use of EOTs, as they provide a tax-efficient alternative to traditional buyouts.”
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He added: “Entrepreneurs worried that selling to private equity would lead to too dramatic a change in their business may find an EOT agreement more suitable. It’s a way for founders to exit while rewarding the employees who helped build their company.”
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