When discussing the potential for an EOT with our clients, there are a number of key practical questions that commonly arise.
What happens if the EOT decides to sell its shares in the company or group to a third party purchaser?
The tax analysis is dependent on whether or not the EOT is resident in or outside of the UK, but any distribution of 'net of EOT tax' proceeds to the employee beneficiaries (after any remaining deferred consideration has been paid to the original vendors) will be taxed as employment income.
Can we still incentivise key employees with discretionary bonuses (for instance, non-EOT bonuses)?
A carefully constructed non-EOT bonus scheme can be designed to incentivise and reward key employees to grow the business and to grow the value of the shares held by the EOT. As long as the rewards payable under the bonus scheme are established for genuine commercial reasons this should not compromise the qualifying status of the EOT.
Can we still incentivise key employees with equity?
One of the main concerns or drawbacks with EOT structures, is the perceived inability to incentivise key management, in the form of equity. However, as long as it is structured appropriately, it is possible to implement a share or share option scheme for such individuals as long as the scheme doesn't result in a disqualifying event, notably, that upon acquisition or exercise the EOT will still hold a controlling interest (at least 51 per cent).