This year marked a decade since Employee Ownership Trust (EOT) legislation was introduced in the UK under the 2014 Finance Act.
This legislation provided the framework for the establishment of EOTs and, as succession planning becomes a critical issue for some family businesses and SMEs in Northern Ireland, EOTs present a robust structure for business continuity and employee retention, offering distinct legal and tax benefits to company owners.
The Department for the Economy has recently published a report emphasising the potential of employee ownership models, like EOTs, to boost local economic resilience, attract talent, and foster long-term stability by maintaining the company ethos through employee control.
This model is particularly beneficial in Northern Ireland, where recruitment and retention are prominent concerns, and where regional economic development can be strengthened by encouraging employee-vested interest in business success.
EOTs offer both legal and tax advantages, ensuring the business is held in a trust for the benefit of employees rather than being sold to external parties. For family business owners, this structure can be an attractive option, allowing them to step back from daily operations while preserving the company’s legacy and values for future generations.
Take-up of EOTs was slow throughout the UK in the early years after the arrival of the legislation, before a dramatic rise in prevalence since the end of 2020.
Take-up in Northern Ireland initially lagged behind other regions of the UK, but that has changed during the last year, with more and more businesses adopting this model of ownership.
From a legal standpoint, EOTs offer several benefits that make them an appealing option for business succession:
- Capital gains tax relief: Selling a controlling interest (over 50%) to an EOT may qualify for capital gains tax relief, making this a cost-effective exit strategy compared to standard sales.
- Employee retention and morale: According to the Department’s findings, EOT structures encourage higher employee engagement and morale by directly linking staff to the company’s long-term goals. By holding the business in trust for employees, this approach addresses retention and satisfaction, aligning well with Northern Ireland’s workforce development needs.
- Preserving legacy and values: Unlike external sales, EOTs maintain continuity by keeping the business within familiar hands. This ensures that the values and culture are preserved, which can be especially meaningful for family-owned businesses.
- Estate planning advantages: Integrating an EOT into estate planning helps business owners secure long-term financial stability for their family while considering employees’ welfare, striking a balance that supports both personal and business legacies.
Northern Ireland has seen notable EOT transitions recently, indicating increasing adoption of this model. These deals highlight how EOTs can safeguard the business’s future while creating a tax-efficient, employee-centred approach to succession.
Given the changes to capital gains tax and business asset disposal relief in the recent Budget, for business owners looking at succession, EOTs offer a strategic, tax-efficient option that promotes employee loyalty and protects the business’s core identity - a key to long-term sustainability.
- Barry McDonough is associate at Arthur Cox