UK Employee Ownership Trusts Delivering Positive Results: Key Findings from HMRC Research

A comprehensive evaluation by HMRC and Ipsos has confirmed that Employee Ownership Trusts (EOTs) are successfully achieving their policy objectives, delivering significant benefits for both companies and employees across the UK.

Research Overview

The qualitative study, conducted between December 2023 and February 2024, involved 30 in-depth interviews with trustees and former owners of EOT companies. The research examined the effectiveness of three key tax reliefs designed to incentivize company transitions to employee ownership:

• 100% Capital Gains Tax relief for company owners transferring to EOT

• 100% Inheritance Tax relief on asset transfers to EOTs

• Income tax exemption on annual employee bonuses up to £3,600

Key Findings

Capital Gains Tax Relief Drives Adoption

CGT relief emerged as the most influential factor in owners' decisions to transition to EOTs. Many participants indicated they would not have chosen the EOT model without this relief, or that reduced relief would make the decision significantly harder. This tax advantage made EOTs more financially attractive than other disposal options like Business Asset Disposal Relief.

Strong Employee Engagement Benefits

The research revealed substantial improvements in employee engagement following EOT transitions:

• Increased staff retention and reduced turnover

• Enhanced employee interest in company affairs and financial performance

• Greater input into decision-making through trustee board representation

• Improved job security perceptions among staff

Positive Business Outcomes

Companies reported multiple benefits from EOT adoption:

• Improved client perceptions and retention of long-term contracts

• Enhanced company reputation in professional networks

• Smoother succession planning allowing gradual owner exit

• Preservation of company culture and values during ownership transition

Tax-Free Bonuses Support Engagement

While not a primary motivating factor for transition, the £3,600 tax-free employee bonus was valued as the most tangible benefit for employees and helped build buy-in during the transition process.

Smooth Transition Process

Most companies found the EOT transition process straightforward, particularly when using specialist advisors. The process typically took 6 months to 2 years, with companies appreciating the efficiency compared to third-party sales negotiations.

Research Conclusion

The evaluation confirms that EOTs are delivering on their policy promise. As the research states: "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."

The findings demonstrate that EOTs successfully provide an attractive exit route for business owners while preserving jobs, maintaining company culture, and genuinely enhancing employee engagement - validating the policy framework supporting employee ownership in the UK.

Expert Commentary: The Importance of Post-Transition Employee Engagement

Graeme Nuttall OBE, international ambassador of United Kingdom-based Employee Ownership Association, and a pioneer of employee ownership highlighted a critical aspect of the research findings - the vital importance of proper employee engagement mechanisms following EOT transitions. The research revealed concerning "misunderstandings from employees and uncertainty about what an EOT model meant for them" in some cases.

Nuttall, recently appointed Fellow of the US-based National Center for Employee Ownership, emphasized that achieving genuine employee ownership benefits requires more than just completing the legal transition:

He stressed that responsibility for fostering an employee ownership ethos lies squarely with trustee directors, not with HMRC guidance, noting:

The research supports this view, demonstrating that "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 highlights how skilled adviser intervention during the transition process is crucial for long-term success.

Nuttall also noted some limitations in the research methodology, particularly the lack of sufficient input from professional advisers (only two were interviewed), which may have resulted in missed insights about the technical benefits of CGT relief, such as addressing credit risk concerns over deferred consideration periods.

Based on HMRC Evaluation Report 795: "Qualitative evaluation of Employee Ownership Trusts" conducted by Ipsos, 2024