Have you recently completed selling to an Employee Ownership Trust (EOT)? Are you wondering what are the requirements once it has completed?

(EOTs) are increasingly favoured by business owners seeking to secure a legacy, reward employees, and access tax-efficient succession options.

Completing an EOT transaction is a major milestone, but understanding the ongoing responsibilities is crucial to maintaining compliance and ensuring the model’s long-term success.

Trust governance and oversight

Following the completion of an EOT, the trust typically becomes the majority shareholder in the company, holding over 50% of the ordinary share capital.

From this point forward, the trust must be managed in line with its trust deed, which outlines its purpose, operational scope, and the trustees’ obligations. It is essential that trustees meet regularly to oversee the company’s operations and ensure decisions are aligned with the interests of all employee beneficiaries.

One area that requires particular attention is the composition of the trustee board. While it’s common for company directors and employee representatives to serve as trustees, the inclusion of an independent trustee is strongly recommended.

This role helps provide impartial oversight and can safeguard against potential conflicts of interest, especially in situations where the former owners remain in key management roles.

Without independent input, there’s a risk (even if unintended) that decisions may favour those with historical or financial ties to the business, rather than the wider employee group.

An independent trustee helps to reinforce transparency, balance power, and ensure the trust remains focused on its primary purpose: benefiting all employees fairly.

Maintaining EOT tax benefits

The EOT structure offers significant tax advantages, including full Capital Gains Tax (CGT) relief on the sale of shares, but these benefits are conditional. To retain them, the company and the trust must continue to meet several statutory criteria.

The trust must maintain a controlling interest in the business, meaning it must hold more than half of both the share capital and the voting rights. It must also operate for the benefit of all employees on equal terms, either uniformly or according to objective measures such as salary, hours worked, or length of service.

Additionally, no more than 40% of the company’s shares can be held by individuals who were significant shareholders before the sale to the trust. Failure to comply with any of these conditions can result in the loss of valuable tax reliefs, making regular review and monitoring essential.

Fostering an ownership culture

Beyond meeting legal requirements, the long-term success of an EOT relies heavily on building a culture of engagement and ownership among employees.

Clear and consistent communication is vital. Employees should understand how the trust functions, their role as beneficiaries, and how the business is performing.

Encouraging participation through employee forums or trustee board representation helps to strengthen engagement and trust. Many EOT companies also choose to introduce employee bonus schemes, offering tax-free payments of up to £3,600 per person annually, provided the relevant HMRC conditions are met. These incentives not only reward performance but also reinforce the collective success ethos at the heart of employee ownership.

Administrative and reporting obligations

An EOT is a legal entity and must fulfil its administrative obligations accordingly. This includes preparing annual accounts for the trust and ensuring that any required reporting to HMRC is completed accurately and on time.

While the trust is often exempt from tax on the acquisition of shares, it still has responsibilities regarding the Trust Registration Service (TRS). Even if no tax is due, all EOTs must be registered.

Staying on top of these formalities is essential to ensure the trust’s ongoing compliance and to avoid penalties or administrative issues down the line.

The importance of ongoing professional support

Although the EOT transaction marks the beginning of a new phase for the business, ongoing professional guidance remains critical.

Regular check-ins with experienced accountants and legal advisers can help ensure compliance with HMRC regulations, maintain sound financial management of the trust, and support a smooth transition into a fully functioning employee-owned business.

This proactive approach allows the business to reap the long-term benefits of the EOT model while avoiding pitfalls that can arise from neglecting its post-completion obligations.

Conclusion

Establishing an EOT is a powerful way to secure your business’s future, but the work doesn’t end once the transaction is signed off.

Governance, compliance, communication, and administration are all part of the trust’s ongoing responsibilities. With the right planning and continued support, an EOT can deliver significant value, not just to the business owner, but to every employee with a stake in its future success.

If you’ve recently completed an EOT or are considering your options, we’re here to help you navigate the next phase.

Get in touch with our team to ensure your trust is well managed, compliant, and built for long-term success.