The Role of Employee Share Ownership Trust (ESOT)

The Role of Employee Share Ownership Trusts


The Employee Share Ownership Trust (ESOT) is not itself a form of HMRC approved scheme (although it makes use of such schemes) but it is potentially tax effective.

At the heart of an ESOT is an Employee Benefit Trust (EBT) whose main object is to benefit the employees of the company which establishes it. A secondary object of the trust is to acquire shares of that company and to transfer these, on beneficial terms, to the employees. The EBT can also create an internal market for shares in an unlisted company.

The EBT will either acquire new shares or purchase shares from existing shareholders. The EBT is usually designed so that its trustees may borrow from outside sources in order to allow that EBT to acquire a substantial stake in the company. The company itself funds the repayment of the external borrowings by making regular voluntary contributions to the EBT. Such contributions if structured correctly, are fully tax deductible by the company. There is no specific requirement for trustees to borrow to fund share purchases, and such share purchases may be funded out of voluntary contributions by the company. This may well, however, restrict the trustees' ability to take up large share offers.

The EBT will usually transfer the shares to the employees through an Inland HMRC approved employee share scheme to avoid income tax becoming payable by the employees receiving the shares.

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