In addition, if the selling shareholders are the sole directors of the Trading Company and the Trustees, or sole directors of the Trust Company, HMRC may have some issues with this when considering any clearance under the transactions in securities rules.
Without going into all the technicalities, the main conditions for an EOT are as follows:
- The Company must be a trading company or the holding company of a trading group. This is the same definition as was used for entrepreneurs' relief.
- The number of continuing shareholders who are directors or employees and all continuing 5 per cent participators (broadly shareholders) must not exceed 40 pre cent of the Trading Company or Group’s total employees. This makes an EOT difficult to establish in a company where there are only a few employees. Persons connected with such shareholders are included for the purpose of this ‘limited participation’ test. The aim of this condition is to ensure there has been a significant change in ownership of the Trading Company.
- Trustees must ensure that all property settled into the EOT is for the benefit of all employees on the same terms.
- The transfer must be of at least a controlling interest, that is greater than 50 per cent, and this must be retained on an ongoing basis. For this purpose, control is on a full economic basis looking at ownership of votes and entitlement to dividends or assets on a winding up.
- The EOT’s assets must be applied only for the benefit of all eligible employees, other than ‘excluded participators’, on equal terms. Eligible employees are those employed by any group member company or the holding company. Distinction may be made between employees based on hours worked, length of service or remuneration. There may also be exclusions for a probationary period (not more than one year) and in certain disciplinary situations). Excluded participators are all 5 per cent or more ‘participators’, including all such participators in the ten years before the commencement of the EOT. These bonuses cannot be used as part of a salary sacrifice arrangement or linked to individual performance conditions. In reality, they should be regarded as a form of profit shares over and above existing remuneration arrangements.
It may be desirable for a few key employees to be given additional incentives, perhaps by way of EMI options. This is possible providing the options are not over shares owned by the EOT. Care should be taken in view of the ownership condition.
