Research and analysis

Evaluation of Employee Ownership Trusts

Published 22 May 2025

Qualitative evaluation of Employee Ownership Trusts to explore the extent to which availability of tax reliefs incentivise company owners to transition their company to employee ownership.

HM Revenue and Customs (HMRC) Evaluation Report 795.

Research conducted by Ipsos between December 2023 and February 2024. Prepared by Ipsos for HMRC.

Disclaimer: The views in this report are the authors’ own and do not necessarily reflect those of HM Revenue and Customs.

1. Glossary

1.1 Key terms and definitions

Term	Description
Business Asset Disposal Relief (BADR)	A tax relief that offers lower rates of Capital Gains Tax on the sale or ‘disposal’ of all or part of a business. Usually, this means the Capital Gains Tax paid on all gains on qualifying assets is 10%. Previously named ‘Entrepreneur’s Relief’ before 6 April 2020.
Capital Gains Tax (CGT)	A tax on the profit from the sale of (or ‘disposal of’) something (an ‘asset’) that has increased in value.
Company Share Option Plan (CSOP)	A tax advantaged share scheme under which a company may grant options to buy shares to their employees. An employee may be granted options over shares worth up to £60,000 which can be purchased in the future at a fixed price. These shares are exempt from Income Tax or National Insurance contributions on the difference between what was paid for the shares and what they are actually worth.
Disposal (of a business or asset)	Disposing of an asset includes selling it, giving it away as a gift, transferring it to someone else, swapping it for something else, or receiving compensation for it (for example, in the form of an insurance payout if it has been lost or destroyed).
Employee bonus	A form of financial reward or compensation given by employers to employees. Bonuses are subject to income tax unless otherwise exempt.
Employee Ownership Trust (EOT)	A corporate structure whereby a company is indirectly owned by its employees via a trust, which controls the company for the benefit of the employees. Companies operating under an EOT structure are owned and controlled by the trustees of the EOT, who are required to exercise their control of the company for the benefit of its employees.
Enterprise Management Incentives (EMIs)	A tax advantaged share scheme that gives companies with assets of £30 million or less and fewer than 250 full time employees, the ability to grant options to buy shares worth up to the value of £250,000 in a 3-year period to their employees. Employees will not have to pay Income Tax or National Insurance if they buy the shares for at least their market value when the employee was granted the option.
Inheritance Tax)	A tax on the estate (the property, money and possessions) of someone who has died. Inheritance Tax may also be charged on certain lifetime transfers, such as transfers into and out of trusts.
Save as You Earn (SAYE)	A savings-related share scheme where employees can buy shares with their savings for a fixed price. Individuals can save up to £500 a month under the scheme. At the end of their savings contract (3 or 5 years) they can use the savings to buy shares. The interest and any bonus at the end of the scheme is tax-free and Income Tax or National Insurance is not paid on the difference between what was paid for the shares and what they are worth.
Share Incentive Plans (SIPs)	A tax-advantaged share scheme for an employee to acquire shares in the company they work for. If someone gets shares through a Share Incentive Plan (SIP) and keeps them in the plan for 5 years, they will not pay Income Tax or National Insurance on their value. Capital Gains Tax is not applied to shares sold if they are kept in the plan until sold.

1.2 Evaluation audience definitions

The following definitions explain who the interviews were conducted with and how they are defined in this report. For the purposes of this report ‘Director’, ‘Former owner’ and ‘Trustee’ have been defined as follows:

Term	Description
Director	Someone who is a member of a company board, has legal responsibility for the company’s business, and can be held accountable for its actions.
Former owner	In the specific context of this evaluation, the term ‘Former owner’ refers to someone who has transitioned a company they previously owned into an EOT model by setting up a trust and selling their company shares to it. Since transitioning their company, all Former owners who participated in this evaluation had since become Trustees and, alongside other trustees, were involved in the ongoing running of the (now) EOT owned company they previously owned.
Trustee	In the specific context of this evaluation, the term ‘Trustee’ refers to a member of a board of trustees that runs a company owned by an EOT. Their role is to ensure the company is acting in the best interests of its employees. Trustees may be previous shareholders, current directors, current employees, professional independent trustees, or other people independent of the company such as solicitors or accountants.
Micro business	In this report, a micro business is a business with 0 to 9 employees.
Small business	In this report, a small business is a business with 10 to 49 employees.
Large business	In this report, a large business is a business with more than 250 employees.

2. Executive Summary

2.1 Introduction and background to the evaluation

HM Revenue and Customs (HMRC) commissioned Ipsos to carry out a qualitative evaluation of Employee Ownership Trusts (EOT) to explore the extent to which availability of the relief influences decision making when setting up a scheme.

EOT is a corporate structure whereby a company is indirectly owned by its employees through a trust. The trust consists of trustees, who are required to exercise their control of the company to the benefit of the employees.

Three tax reliefs were introduced by HMRC to incentivise company owners to transition their companies to indirect employee ownership using the EOT model. These tax reliefs are:

• 100% Capital Gains Tax (CGT) relief for company owners who transfer their company to an EOT model
• 100% Inheritance Tax (IHT) on the transfer of assets to the EOT, and exemption from the IHT charges that may otherwise apply to types of trusts.
• exemption from income tax on annual bonuses of up to £3,600 made by an EOT-owned company to employees

This evaluation had 3 key focus points:

1. The impact of each of the three tax reliefs associated with the EOT model, both in terms of driving initial consideration and longer-term impact following transition.
2. The experience of companies using an EOT model and the impact of this model on their strategic plans, goals and structure.
3. The impact of an EOT model on employees working in a company that uses this model, specifically on employee engagement and the work-related benefits made available to employees.

2.2 Method and sample

The evaluation consisted of 30 in-depth qualitative interviews with trustees of companies that were operating under an EOT model, some of whom were former owners of the companies. Trustees were asked about their experiences of operating under an EOT model, their experiences of transitioning to it, and the factors that affected former owners’ decisions to choose an EOT model.

2.3 Key findings

Impact of tax reliefs on the decision to use an EOT model

Of the three tax reliefs explored as part of the evaluation, CGT relief was reported to have a positive impact on former owners’ decision to transition to an EOT model. Former owners reported CGT relief was a strong selling-point of the EOT model and one that made it more financially desirable than other forms of business disposal (such as Business Asset Disposal Relief, or other employee ownership schemes such as Enterprise Management Incentives or a Company Share Option Plan).

Many evaluation participants reported that changes to CGT relief would have made the prospect of transitioning to an EOT model less appealing.

Some reported that the decision of choosing an EOT model over other options would have been harder to make if CGT relief were reduced or removed. Others reported that they would not have chosen the EOT model were the level of relief equal to, or less than the level offered by other schemes (for example, Business Asset Disposal Relief).

Former owners recognised the benefits of tax-free employee bonuses for their staff, but the ability to give them was often seen as an additional ‘nice to have’ rather than a key driving factor in their decision to use an EOT model.

Trustees who were not former owners reported that the tax-free employee bonuses were seen as important for employees. They were seen as the most tangible benefit of being part of an EOT-owned company for employees. As a result, some considered that this made it easier for former owners to ‘sell’ the idea of transitioning to an EOT model to employees. However, some trustees who were not former owners also reported that they thought the former owners of their companies did not see employee bonuses in the same way and instead saw these as less of an important factor in their decision to choose an EOT model.

Inheritance tax relief was considered to be the least important tax relief. It also appeared to be the least well known, and, for those that participated in the evaluation, it had not been a motivating factor that influenced their decision to choose an EOT model. As such, participants reported that reducing or removing this relief would have contributed less to their decision when considering an EOT model.

Impact of an EOT model on companies using this model

Transitioning to an EOT model was reported to help maintain employee engagement and to build on positive company cultures and values where these had already been established.

Some also reported that they considered an EOT model to provide a form of stability while a company owner gradually stepped away from an organisation and allowed employees to slowly get used to changes in leadership and ownership, providing reassurance around job security. This was considered to help with staff retention as former owners predicted employees may otherwise be more likely to consider leaving the company were there to be a more immediate change in ownership.

For former owners, it was reported that their job role and responsibilities were typically still related to financial and strategic decision-making, but often to a lesser extent and in more of an advisory role, with plans to steadily reduce involvement moving forward. The gradual transition of ownership that an EOT model was considered to provide was also reported to give owners the opportunity to train and upskill other members of staff within the organisation. This was done with a view to them taking more of an active role in the running and leadership of the company when the owner left. It was also anticipated by some that this reduced the risk of the company underperforming should new leaders be brought in and require time to immerse themselves in the business.

While the direct financial impact of using an EOT model was not commented on by interviewees, some former owners anticipated that transitioning to an EOT model may indirectly and positively affect finances in the longer term, as a result of increased employee engagement. Some reported, for example, that transitioning to an EOT model had encouraged employees to feel like they had a stake in the company and, in turn, were considered to be more motivated to act in ways to encourage company growth and fulfil its longer-term strategic goals.

Some also reported that transitioning to an EOT model had improved the perception of their company among clients, resulting in repeat custom and retention of long-term clients or contracts.

Impact of an EOT model on employees

As discussed above, transitioning to an EOT model was reported to have a positive impact on employee engagement. In particular, it was felt to provide a tangible and more official way for employees to influence the company they work for. It was also felt to indicate a commitment to instilling an employee-centric culture.

Interviewees reported that transitioning to an EOT model increased or formalised previous methods of employee engagement and gave examples of representation on the trustee board and regular meetings or reports to staff about business finances as means of achieving this.

Some also reported that transitioning to an EOT model was expected to offer a degree of protection for employees, particularly against undesirable changes to the company during a transfer of ownership because an EOT is required to act in employees’ best interests. Transferring to an EOT model was felt to mitigate concerns around structural or process-led company changes. These changes included possible job cuts or redundancies, changing locations, or changing existing roles, procedures or employee-friendly policies – each of which were considered to be possible risks of selling through other means, such as sale on the open market.

3. Evaluation background and method

This section describes the policy context for the evaluation, its aims, and methodology. It also provides detail on the sample of trustees, directors and former owners of EOT-owned companies that were interviewed.

3.1 Evaluation background

HMRC commissioned Ipsos to carry out a qualitative evaluation of EOT to explore the extent to which availability of the relief influences decision making when setting up a scheme.

EOT is a corporate structure whereby a company is indirectly owned by its employees via a trust. Companies operating under an EOT structure are owned and controlled by the trustees of the EOT. They are required to exercise their control of the company for the benefit of the employees.

Three tax reliefs were introduced by HMRC to incentivise company owners to transition their companies to indirect employee ownership using the EOT model. These tax reliefs are:

• 100% CGT relief for company owners who transfer their company to an EOT model.
• 100% IHT relief on the transfer of shares to the EOT, and exemption from the IHT charges that may otherwise apply to types of trusts
• exemption from income tax on annual bonuses of up to £3,600 made by an EOT-owned company to employees

3.2 Evaluation aims

This evaluation was designed to provide HMRC with insight on the extent to which tax reliefs incentivise company owners to transition their company to employee ownership. Additionally, HMRC sought to understand the success of the current EOT policy and, more specifically, how effective the EOT model is in delivering employee engagement within EOT-owned companies.

The key topics the evaluation explored included:

• the extent to which availability of EOT tax reliefs is a deciding factor in setting schemes up
• the likelihood of considering EOT models in the absence of such reliefs
• the extent to which the EOT model results in greater employee engagement

HMRC also established seven core evaluation questions. These focused on the impact of EOT tax reliefs, the impact of transitioning to an EOT model on companies, and the impact on employees.

The following questions were posed as hypothetical scenarios to understand the effect of the relief:

Impact of EOT tax reliefs

• how likely are owners to consider an EOT model in the absence of tax reliefs?
• what is the relative importance of each tax relief available?

Impact of transitioning to an EOT model on companies

• what are the impacts of an EOT model on EOT-owned companies?
• what are the impacts or value of former owners remaining in the company?

Impact of transitioning to an EOT model on employees

• do EOT models result in greater employee engagement?
• what does employee engagement look like in EOT-owned companies?
• what advantages do EOT models bring to employees?

4. Methodology

The findings in this report are based on 30 in-depth interviews. Interviews were conducted using Microsoft Teams or on the telephone and lasted up to 60 minutes. The fieldwork period was between December 2023 and February 2024. As is standard with a qualitative evaluation, findings in this report reflect the attitudes and experiences of the people interviewed and should not be used to draw statistical conclusions or considered to be fully representative of the wider target population. Participants of the evaluation were recruited via a sample provided by HMRC.

5. Evaluation sample – key characteristics and attributes

Of the 30 interviews conducted, 15 were undertaken with trustees of EOT-owned companies where the trustee was also the former owner of the company prior to transitioning to an EOT model. The remaining 15 interviews were with company directors or other trustee types (where trustees sat on the employee ownership board but were not a former owner of the company prior to transitioning).

Recruitment purposefully sought to include companies with a range of the following characteristics:

Length of time operating as EOT

5 companies had been operating under an EOT model for 6 months to less than 1 year, 11 had been operating under an EOT model for between 1 and 2 years, and 14 for more than 2 years.

EOT ownership share

15 companies were fully owned by an EOT, 14 were partially owned by an EOT (one was uncertain).

Company size

4 micro, 21 small and 5 medium sized companies were included in the evaluation.

Number of employees

Most companies that participated had between 5 and 30 employees, a small number had 50 or more employees.

Sector

Companies operated across a range of service related industries (including consultancy, IT solutions, and cleaning and repair services).

Although not purposefully screened for, companies also represented a broad mix of full and part time employees, and a mix of previously family and non-family owned companies.

The key characteristics and attributes of trustee boards were not purposefully screened for at the point of recruitment. However, across the evaluation sample, these typically comprised a mix of former owners, directors, CEOs, employee representatives, and, for some, independent trustees. The number of trustees ranged from 2 to 6, often with representatives from different parts of the company, such as managerial, financial, directorial, and employee roles. In instances where an employee was present on the board, their appointment was often a result of being elected as a representative by other employees, or after being selected by the company owner. While not all boards included independent trustees, those that did reported that these had no financial stake in the company. In two cases, independent trustees were reported to be the accountant or financial advisor who had originally assisted the company with the transition to operating under an EOT ownership model.

6. Awareness, understanding, and motivations for transitioning to an EOT model

The following section explores interviewees’ awareness and understanding of the EOT model, as well as the reasons for choosing to use an EOT model.

6.1 Awareness and understanding of the EOT model

Former owners who were researching exit plans first heard about the EOT model through two main avenues. One was through company accountants or advisors during wider discussions about exit plans or employee ownership models. The second was through online sources when researching different options for business disposal. Most former owners who were not intentionally researching exit plans or ownership models reported their initial source of information about EOT models was through other companies in their peer network. These companies had already successfully transitioned to an EOT model and were sharing their experiences in general conversation and at business conferences or networking events.

Other companies using an EOT model also remained sources of information about EOTs for former owners during their own transition period. Some also mentioned social media as a source of information for them, particularly LinkedIn where other companies had posted about their successful transition to an EOT model.

‘They [the former owner] did a bit of exploring within another company. They’d spoken to members of the management team there and the previous owners of the business, just to get a taste of what was involved.’ Trustee, EOT model for 1 year

During the transition process, former owners spoke of how they hired advisors and consultants, who specialised in EOT models, to provide advice and guidance. For those that appointed independent trustees, their backgrounds were mostly in finance, and they had a strong understanding and prior experience of EOT models and how to support a company transitioning.

Former owners were confident in their understanding of EOTs and felt they were well-informed to begin the transition process. During interviews, former owners spoke confidently about what an EOT model is and how it can be beneficial to their company and employees.

6.2 Motivations for transitioning to an EOT model

Some former owners chose to transition to an EOT model to begin their exit from the company. Typically, this was due to having retirement plans within the next 5 to 10 years. For this group, transitioning to an EOT model meant they could begin the process of handing over ownership and gradually stepping away from everyday management of the company. Owners who hoped to retire found the EOT model compared favourably to other exit strategies, primarily selling to a third party or on the open market. For example, by retaining company legacy and securing employees’ jobs.

‘The main reason for transferring [to an EOT model] was to get an exit as it was always in the back of my mind to retire, but I didn’t want to sell the company due to employees’ jobs put at risk… I was looking for the most efficient exit.’ Former owner, EOT model for greater than 2 years

Another reason for choosing to transition to an EOT model was to encourage and reward employee engagement and retention. Some former owners were motivated by the prospect of ‘giving back’ to their employees, especially those who had long-serving staff, and thought that the transition would provide an opportunity for employees to feel that they had a stake or vested interest in the company. As a result, it was expected by some that the transition would help to maintain or improve levels of employee motivation and engagement which, in turn, would contribute to financial growth for the company. It was, however, also expected that such impacts would likely be hard to quantifiably measure.

Within the sample for this research, most former owners who chose to transition to an EOT for the benefit of their employees reported already having an inclusive company culture prior to the transition and reported positive and well-established relationships between both colleagues and middle and senior management teams. Such cultures were also reported to have had positive impacts on encouraging employee engagement and in maintaining good levels of staff retention, even before transitioning to an EOT model. For example, some reported that their employees would speak about their colleagues being like family and proudly identified as an employee of their company. Former owners explained that this company culture meant that the EOT model fitted their company well by strengthening the pre-existing qualities of inclusivity, transparency, and friendliness.

Ensuring the security of staff and jobs within the company was also a motivating factor when deciding to choose an EOT model. Former owners reported that transitioning to an EOT model provided more employment security than other exit plans, such as selling the company to a third party which offered no guaranteed preservation of existing structures and roles. Under an EOT model, it was noted that employees would be able to keep their jobs and company operations would be maintained in house, providing reassurances to employees during the transition.

‘The majority of the workforce is employed locally, and we didn’t want to see the business close and relocate to the centre of England or somewhere. So, that [selling to a third party] was ruled out for the continuity of the business and this [EOT model] was one of the options that was brought up.’ Former owner, EOT model for 1 to 2 years

Another motivation for companies transitioning to an EOT model was protection of the legacy and culture of the company and continuing, or increasing, company growth. Former owners who were planning to retire typically had emotional attachments to their company and did not wish to sell to an external body what was seen as a tangible outcome of their hard work and achievement. Instead, they wanted to keep the company the same as it was under their ownership, whilst creating opportunity for future growth and progression. If current employees who knew the company well moved into a directorial role within the company, owners felt that this would help to grow the company or maintain stability.

Another appealing and motivating factor for some former owners was a perception that transitioning to an EOT model would be a simpler process than selling the company on the open market. There were several aspects which former owners felt would mean a quicker and more efficient transition:

• less legal administrative burden than selling on the open market, particularly with the help of a specialist EOT advisor

• reduced time and effort spent negotiating sale price

• quicker to transition to an EOT model than the potentially long process of finding and selling to a third-party buyer

• provides a guaranteed exit as opposed to a process where third parties could pull out of a sale

Some former owners considered other options for disposing of their company or other employee engagement schemes before deciding to transition to an EOT model. Compared to other employee ownership models (EMI and CSOP) or management buy-outs, the EOT model was perceived by former owners as the most favourable for employees.

Although not always a key motivation for initially choosing an EOT model, the tax reliefs provided through transitioning to an EOT model were attractive for former owners. The reliefs had varying degrees of influence on the decision to transition to an EOT model, which is explored further in Chapter 6.2.

7. Impact of tax reliefs on the decision to transition to an EOT model

The following section explores how CGT relief, tax-free employee bonuses, and inheritance tax relief affected decisions to transition to an EOT model. It also discusses hypothetical scenarios related to appropriateness and proportionality (in the form of reduced or removal of EOT tax benefits) and explores how these would influence considerations and motivations for transitioning to an EOT model.

There are three key tax reliefs (please refer to the glossary for definitions) associated with an EOT model:

• 100% CGT relief for company owners who transfer their company to an EOT model
• 100% IHT relief on the transfer of assets to the EOT, and exemption from the IHT charges that may otherwise apply to types of trusts.
• exemption from income tax on annual bonuses of up to £3,600 made by an EOT-owned company to employees

7.1 Capital Gains Tax Relief

The 100% CGT relief was the most influential tax relief on former owners’ decisions to use an EOT model compared with the other tax reliefs available.

For former owners who transitioned to an EOT model as an exit plan, for example to retire, the CGT relief was a key factor in choosing an EOT model compared with other exit plans. Some former owners reported that they would not have chosen an EOT model if there were no CGT relief, and others said it would make the decision harder. This was reported by former owners whose main aim in transitioning to an EOT model was to acquire funds from the sale of their business, for example to fund their retirement. These former owners also recognised and valued these non-financial benefits, but reported they would prioritise selling the business for more money via another method if an EOT model no longer provided a financial advantage.

These former owners also explained that if the CGT relief associated with the EOT model was reduced, they would have still considered but may not have chosen to use an EOT model. Some reported that CGT relief would need to have been more financially advantageous than other options, such as BADR, to be worthwhile. Others reported it could be lower than other options, however it would lower the overall attraction of an EOT model and might cause them to consider other exit plans more seriously.

However, there were also former owners who reported the CGT relief had little impact on their decision to use an EOT model and would have still chosen to use an EOT model if there was no CGT relief or if it was reduced. The former owners who felt this way fell into two broad categories. The first were those who had chosen to use an EOT model for reasons other than an exit plan, for example to increase staff engagement and to promote business growth. The second were those who had chosen to use an EOT model as an exit plan but wanted to gain benefits that they felt other exit plans could not provide. These benefits included job security for their employees, guaranteed continuation of their company in its current form, simpler administration, and a guaranteed sale.

‘If there were no tax benefits to any shared ownership scheme, then the EOT model would still have some attractions such as low admin costs going forward… Our motivation for doing it was to engage the employees and to grow the company. [EOT] was very desirable. It was the clear winner of the options.’ Former owner, EOT model for greater than 2 years

There were also some former owners who were more neutral to a reduction in CGT but reported that they would still not advocate for its complete removal. This group appreciated the availability of CGT relief as an additional benefit, alongside the other benefits of an EOT model.

7.2 Tax-free employee bonus

The ability to give annual tax-free bonuses of £3,600 to employees was acknowledged as a valued aspect of the EOT model. However, former owners felt it did not significantly affect their motivation or decision to transition to an EOT model.

‘I don’t think the £3,600 tax free is a real driver for anyone involved in deciding whether to do it or not. But for me, it’s one of those soft things.’ Former owner, EOT for 2 years

The hypothetical removal of tax-free bonuses was still seen by interviewees as a negative. This was because it was seen as reducing the overall benefit of the EOT model for employees, particularly because the tax-free bonuses were the most visible or tangible aspect of being part of an EOT-owned company for employees. It was felt that removal of this feature would have two specific negative impacts. Firstly, interviewees noted that it might become harder to engage employees and for them to see transitioning to an EOT as a positive thing, potentially leading to a more difficult transition process. Secondly, it was reported that this may remove an important source of encouragement for employees to be engaged and to work in the best interests of the company for its future growth and development. This was mostly found with former owners who did give their employees bonuses.

‘[Removing tax-free bonuses] would impact significantly on the success of the company post transfer. Employees would ask “What’s in it for me?” ‘ Trustee, EOT for greater than 2 years

7.3 Inheritance Tax Relief

The IHT relief associated with the EOT model ensures that EOTs are outside of the scope of the IHT charges that may otherwise apply to assets transferred into and held within certain types of trusts.

In comparison to CGT relief, IHT relief was considered to be a less important tax relief for former owners interviewed and less influential in terms of their decision to choose an EOT model. However, it is worth noting that most reported that they had either not heard of it, did not remember it, or did not know details of how it worked (for example, they did not know who the IHT relief was for, or what it would be applied to).

This lack of awareness about IHT relief was a consistent theme among both the former owners and trustees who participated in the evaluation. Some expressed a desire to learn more about this and displayed an element of surprise that they had not heard about it before the interview. However, former owners who had little or no knowledge about this relief still reported that the EOT model had enough other benefits (among those that they were aware of) to prompt consideration and that a reduction, or removal, of IHT relief would not have affected their decision to use the model.

8. Experience of transitioning to an EOT model

The following section explores experiences of the overall process of transitioning to an EOT model, what helped the transition to go smoothly and levels of satisfaction with HMRC interaction during the process.

8.1 Length of time taken to transition

Across both former owners and trustees, the time taken to transition to an EOT model varied. Most found that it took more than 6 months but less than 2 years for the transition to be completed. Interviewees valued how quick and efficient the transition was, especially due to the lack of negotiations needed that would typically be expected with the sale of a company to a third party. Other aspects of the process, such as administrative time and costs, were acknowledged, but were not considered to be a significant burden or off-putting.

8.2 Transition costs

Some former owners reported that the cost of transitioning to an EOT model was higher than they had originally anticipated. For example, one company had expected the costs to be approximately £25,000 but reported final costs were closer to £50,000, with most of these being attributed to legal fees, solicitors, and valuations. Some companies found the costs to be expensive but stated that this did not deter them from transitioning to an EOT model and that transitioning was still worthwhile. For example, they saw the benefits to the company and employees as worth the cost or recognised that the tax savings made from the 100% CGT relief would still be substantial.

8.3 Support and communication

External support during the transition process.

In some cases, former owners had used advisors to help them with the transition to an EOT model. Advisors were mostly solicitors and financial advisors who had specific experience relating to companies transferring to an EOT model. The advice and expertise provided was highly valued by those who used it and contributed to the transition process being perceived as smooth and straightforward. A small number of trustees mentioned that they believed advisors have become more knowledgeable in recent years about EOT models and how to best guide and support companies wishing to transition. This was noticed as a sector-wide improvement and was considered to have helped contribute to a smoother transition.

Without this support, some former owners acknowledged that the process would have been more challenging. Advisors provided owners with a range of guidance and support throughout the transition process. This included providing information and guidance about each step of the transition process and leading any communication with HMRC. It was also reported that some advisors helped with drafting paperwork and, in some cases, communicated with employees to explain the transition and the tax benefits of transitioning to and operating under an EOT model.

Like the transition process, costs of advisors were thought to be expensive, but a worthwhile expense.

8.4 Other types of support during the transition

Some former owners found valuable information and advice about the transition process through organisations representing the employee-ownership sector, and from other companies that had already transitioned. Those who engaged with or were members of such organisations found this a valuable source of information and guidance during the transition process. Former owners noted benefits such as networking with other companies who had already transitioned to an EOT model and hearing about their experiences. It was also considered to be a good opportunity to talk about what worked well during the transition and to ask any questions.

‘We also researched via an employee association…They were a hub of support, as well giving us the opportunity to ask questions.’ Former owner, EOT model for 1 to 2 years

8.5 Communication throughout the transition process

Former owners who pro-actively communicated the transition to an EOT model with their employees reported a smoother transition process than those who had not communicated with employees ahead of transitioning. Some former owners opted to transition to an EOT model without prior notification to their employees, a decision that was not received positively. In such instances, interviewees reported that their employees told owners they would have appreciated being more involved. In a couple of cases, this lack of communication caused a divide between the senior leadership team and employees due to what was perceived to be poor management of employee expectations. There were also some misunderstandings from employees and uncertainty about what an EOT model meant for them legally. For example, some employees thought they now ‘owned’ the company. For this group, it was felt that there was a lack of advice available from HMRC that focused specifically on the impact for employees.

‘It has created a ‘them and us’ culture. Employees are trying to understand what it [an EOT model] is and it’s causing a divide. They [employees] feel like they have a right to information [about how it will impact them personally] and we’re having to manage expectations.’ Former owner, EOT model for 6 to 12 months

However, where former owners used an EOT advisor to speak to their employees, and held sessions with employees to answer their questions, the transition to an EOT model was perceived as smooth. This was because employees felt more informed and less uncertain about the transition to an EOT model. Some former owners also reported that they had discussed at length the transition process with their employees. Again, this was well received, and interviewees reported employees having a better understanding. One former owner included their former employees in the actual decision-making process and reported that they decided together that company would transition to an EOT model.

8.6 Interactions with HMRC

Though most former owners and trustees were not directly involved with the interactions between their company and HMRC, any experiences of communications were generally spoken about positively. Experiences of communication and interaction were reported as light touch but smooth with no major issues. Interaction was led by the advisors and comprised of completing paperwork and the clearance process, which was reported by nearly all interviewees. Although interviewees spoke positively about interactions with HMRC, some did highlight areas where additional support would be beneficial, this included:

• official guidance for employees, especially from the government as a trusted and official source

• raise more awareness or advertise the scheme. Some reported that they would not have known about the potential of moving to an EOT model if they had not come across information relating to this when researching more generally

8.7 The role of former owners

After transitioning their company to an EOT model, it was reported that former owners typically remained in decision-making and advisory roles. Those who chose to transition to an EOT model as an exit plan reported plans to gradually reduce their involvement and eventually leave the company in the hands of the trust. Some reported that they were currently training other members of senior managerial staff to take over parts of their role and responsibilities in their absence.

9. Impact and outcomes of transitioning to an EOT model

The following section explores the impacts and outcomes of transitioning to an EOT model, for both companies and for employees. This includes impacts related to staff recruitment and retention, levels of employee motivation and the impact on local market and client perceptions.

Participants reported several positive impacts for their companies and employees as a result of transitioning to an EOT model. Positively, these were broadly in line with initial expectations and motivations (discussed in section 4).

9.1 Employee engagement

Employee engagement took different forms in each company but many of those who participated in the evaluation spoke of improved levels of staff retention, and recruitment. Some reported employees remaining in the company for longer and lower levels of staff turnover. As mentioned previously, while such impacts were considered to be hard to quantifiably measure, some former owners reported anecdotally that they felt staff were less likely to worry about their job security post-transition. This was felt to be especially true for staff whose former owners were gradually exiting the company and where opportunities for taking a more strategic role in the future of the organisation had been presented.

While the direct impact on recruitment was considered to be difficult to measure, some interviewees did report they included the company’s EOT model status on job advertisements in a bid to successfully attract competitors’ employees to work for them.

Similarly, increased employee interest in company affairs and its financial success post EOT model transition was an equally common theme. Former owners reported a feeling of increased interest from staff in company affairs. For example, employees asking more questions relating to finances and the processes behind decision-making in meetings. General anecdotal evidence suggested that staff felt they would benefit from the success of the company and therefore acted in company interests.

Some also reported that they saw employees becoming more engaged with company policies through inputting into decision-making. There were some examples of policies being changed as a result of employee representation on the trustee board. For example, longer parental leave, voluntary weekend working and employee meetings to discuss finances and strategy.

‘The employees meet informally to discuss what they want out of the business. Their suggestions are collected by one of our trustees, who is also an employee, and fed to the EOT board meetings.’ Trustee, EOT model for 1 to 2 years

For those with an already well-established company culture and high levels of employee engagement, moving to an EOT model was reported to help further solidify and embed this across the organisation.

‘I think the staff are certainly more motivated. They want the business to do well because their bonuses are related to them. We are on target to hit our profit target.’ Trustee, EOT model for 1 to 2 years

9.2 Client perceptions

Companies that had transitioned to an EOT model also reported positive perceptions of their company from clients and other companies. Former owners reported receiving praise from their professional business network and saw an increase in interest about EOT models from owners of similar companies. One former owner explained that they had discussed the advantages of transitioning to an EOT model with owners of other businesses within their sector. The owner reported that the other companies then decided to transition to an EOT model after hearing about their positive experience.

Some also reported that their clients looked favourably on the use of an EOT model as it indicated a likelihood for future company stability. For clients, knowing that the company would not be sold and that jobs were more secure was seen as an attractive factor when deciding who to work with . One former owner also mentioned some of their key clients were pleased with the transition to an EOT model because they would continue to be served by the same staff members.

‘Clients are happy that staff are keeping their jobs and are looked after. People love the fact that it’s going to carry on going. People like that it’s the same staff each time, which is partly due to the EOT.’ Trustee, EOT model for greater than 2 years

Companies who needed to provide evidence for positive social and corporate governance, such as in bids for work with government agencies, found that they could successfully use their EOT-owned status as an example of this.

9.3 Tax-free employee bonus amount

Interviewees opinions differed regarding the tax-free employee bonus amount of £3,600. Companies who employed staff on higher salaries felt the tax-free limit was not enough because £3,600 was often lower than the bonuses that staff normally received. Some interviewees also noted that the £3,600 figure had not changed since the introduction of EOT models. This group thought that the amount should change depending on external economic factors, such as the cost of living and inflation.

Companies with staff on low salaries or on the National Minimum Wage felt the £3,600 figure was unrealistic for their circumstances. For these owners, the bonuses they gave were reported to be lower than this amount and viewed the £3,600 figure as a more of a ‘target’ than a ceiling amount – one which they believed to be unattainable for their company.

‘The nature of the company means we’re not going to get to the maximum anyway, but higher paid staff companies will be able to – can’t ever see us getting to £3,600 with the salaries staff are on.’ Former owner, EOT model for greater than 2 years

10. Conclusions

10.1 CGT relief is key motivating factor

CGT appears to be the most positive and influential factor prompting consideration of and affecting decision making related to transitioning to an EOT model. Changes to CGT relief, such as its elimination or a reduction in the relief amount, would likely influence the decision to opt for an EOT model over other exit strategies or business disposal methods. However, responses were nuanced, indicating that the attractiveness of the relief could vary depending on the extent of the CGT relief reduction and its comparison to other CGT relief.

In comparison, in terms of prompting consideration of transitioning to an EOT model, IHT relief is considered to be less of a motivating factor. However, it is worth noting that awareness among former owners of IHT relief appears to be far lower than awareness of CGT relief.

10.2 Tax-free employee bonuses are less of a primary motivation but are still valued

Tax-free employee bonuses are less of a primary motivation when considering whether to opt for an EOT model but are valued as a means of building employee buy-in during the transition process, as well as longer term engagement with operating under an EOT model. They were often perceived as an additional nicety, rather than a key driving factor in the initial decision to use an EOT model. However, former owners recognised that tax-free employee bonuses have benefits for their employees, both in the short and longer term, particularly in terms of driving increased levels of employee engagement and greater motivation to work to support longer term company growth and success.

10.3 The EOT transition is considered to be a smooth process

Particularly for those using external advisers and consulting with peers who have already transitioned to an EOT model, the process of transitioning was generally considered to be a smooth one. Where unexpected issues did occur, these tended to be related less to the features and characteristics of the EOT model and transition process, and more related to external factors such as unexpected, or unplanned for, legal fees.

10.4 EOT model valued and considered to be beneficial for both companies and employees

Insights from this evaluation indicate that for those that have transitioned to operating under an EOT model, this has largely been a positive experience and one which has resulted in a number of highly valued outcomes. This included both financial benefits, and organisational culture and employee engagement benefits.