ESOT vs ESOP | Tax Benefits & Growth Advantages for UK Companies

What is an Employee Share Ownership Trust (ESOT)?

In conjunction with discretionary or all-employee schemes.

Thinking about giving your team a real stake in your business? Employee share trusts can be the tool you’re looking for, not just tax-efficient, but a powerful motivator.

The ESOT or ESOP is a discretionary trust that has the power to borrow for purposes of investing in the company’s shares and which uses one or more bona fide employee share schemes, whether tax-approved or not, to distribute to employees the shares that it has purchased. This arrangement offers considerable cash-efficient and tax-efficient advantages to the structuring of a company’s employee share scheme.

An Employee Share Ownership Plan (ESOP) Trust is a type of employee benefit plan that allows employees to acquire shares in the company they work for. This mechanism is designed to align the interests of employees with those of the shareholders, fostering a sense of ownership and potentially increasing employee motivation and retention.

ESOT vs ESOP: What’s the Difference?

When exploring employee ownership options, businesses often encounter two similar-sounding terms: Employee Share Ownership Trust (ESOT) and Employee Share Ownership Plan (ESOP). While they share the goal of promoting employee ownership, their structures and uses differ significantly, especially in the UK.

Key Differences:

Feature	ESOT	ESOP
Structure	A discretionary trust that holds company shares	A share scheme or plan, often delivered via a trust
Purpose	Long-term ownership or share warehousing	Share allocation over time to employees
Common in UK?	Yes	Increasingly adopted, especially in scale-ups and SMEs
Control	Trustees decide on share allocation	Typically formula-driven (e.g., by salary or tenure)
Tax Status	Can be tax-efficient with CGT and NIC reliefs	May be structured under tax-advantaged schemes
Employee Eligibility	Often discretionary	May be discretionary or all-employee

In Summary:

ESOTs are ideal for retaining shares within the business or transferring control to employees over time.
ESOPs are better suited for rewarding staff directly and tying incentives to performance or tenure.

Top Reasons Companies Use ESOPs:

Boost Performance:
Employee-owned companies often report higher productivity, innovation, and profitability.
Improve Retention:
When employees have a stake in the business, they’re more likely to stay, reducing recruitment and training costs.
Succession Planning:
ESOPs can serve as a succession vehicle, ideal for business owners looking to exit while keeping the company independent.
Align Interests:
Aligns the goals of employees and shareholders, reducing agency conflict and fostering a high-trust environment.
Attract Talent:
Offering share ownership is increasingly attractive, especially to younger, equity-savvy talent pools.

How Does an ESOP Work in the UK?

Establishment

An ESOP Trust is typically established by the company, which sets up a trust fund specifically for the purpose of holding company shares. The trust is managed by a trustee who is responsible for making decisions regarding the trust’s assets.

Funding

The trust can be funded by the company through contributions, which may be in the form of cash or company shares. In some cases, the trust may also borrow money to purchase additional shares.

Allocation of Shares

Shares held by the ESOP Trust are allocated to employee accounts over time, often based on a formula that considers factors such as salary, years of service, or a combination of both.

📞 Explore how to set up an Employee Share Trust. Talk to our team today.

Key Benefits of Employee Share Trusts

Employee Benefits

Share Ownership: Employees gain a direct stake in the company’s success through share ownership, which can motivate them to work towards the company’s growth.
Retirement Benefits: ESOPs can serve as a retirement plan, providing employees with a valuable asset upon retirement.
Tax Advantages: Contributions to an ESOP may be tax-deductible for the company, and employees may not pay taxes on the shares until they are distributed.

Company Benefits

Alignment of Interests: By giving employees a stake in the company, their interests are more closely aligned with those of the shareholders.
Retention and Recruitment: Offering share ownership can be a powerful tool for attracting and retaining top talent.
Tax Benefits: Companies may benefit from tax deductions on contributions made to the ESOP.

Tax Advantages for Employers and Employees

One of the key reasons for implementing an ESOT or ESOP is the favourable tax treatment available in the UK. These schemes can offer significant cost efficiencies for both companies and employees.

For Employers:

Corporation Tax Relief: Contributions of cash or shares to the trust are typically deductible.
No Employer NICs: In some approved schemes, no National Insurance Contributions are due on the shares provided.
Capital Gains Tax (CGT) Deferral: Under certain structures (e.g., in employee ownership trusts), sellers may be able to defer or eliminate CGT on qualifying transfers.

For Employees:

Income Tax Benefits: Shares received via an HMRC-approved plan (like a SIP or EMI) may not be taxed immediately.
No NICs: Employees often avoid National Insurance Contributions on shares received.
Tax-Free Growth: In some plans, shares can grow in value without immediate tax implications.

📢 Example: In a properly structured ESOT, a selling shareholder can transfer control of the business without paying CGT, a powerful incentive in succession planning.