Everything related to Employee Share Ownership Trust (ESOT)

Sep 29, 2022 By Triston Martin

ESOT, Employee Share Ownership Trust, is a flexible stock program to place a company's stocks in the employee's hands. A company setups an ESOT and use it to sell shares to employees. ESOTs are actually the trust accounts that assist the company in achieving its purpose.

What is the role of ESOT? What are the benefits of the Employee Share Ownership Trust (ESOT) program? Which employees can qualify for this stock program? How are they structured? We'll cover all these questions in this ESOT guideline article. Keep scrolling and reading to learn about ESOT deeply. Let's dive into the details!

Understanding an ESOT

ESOT scheme was introduced in 1997 by Finance Act. Employee Share Ownership Trust (ESOT) is quite different from ESOP, Employee Stock Ownership Plan which performs as a form of retirement benefit to the company's employees. The payments acquired by ESOT to provide shares to its employees are tax deductible. Normally, the ESOT is established in conjunction with Approved Profit Sharing Scheme (APSS) and the trust that will obtain the shares.

By allowing the employees to get shares through APSS along with a trust, employees can see particular tax perks from using such a system. APSS is a scheme through which securities/shares are issued to afford the tax relief of employees from the cost of shares up to the annual limit of 12,700. Furthermore, shares can be in the trust for 20 years. ESOTs, to date, have been established in State and semi-state bodies.

Characteristics of Employee Share Ownership Trust (ESOT)

Here are some key elements of this flexible share program.

  • The trust demands revenue approval.
  • The company pays the trustees, and they will only use this money for qualifying purposes.
  • Tax-relief benefit for the company for set up and maintenance costs and payments to trustees.
  • Shares and payments must be provided to all beneficiaries & the transfers should also be on similar terms.
  • Shares can be transferred to the profit-sharing scheme's trustees or sold by the trustees to pay borrowed funds free of capital gains tax.
  • Most typical in the sale of semi-state bodies, although they might have a wide application.
  • If ESOT is set up in conjunction with APSS, shares can be allocated to employees in tax effective way.

What is the purpose of Employee Share Ownership Trust (ESOT)?

Employee Share Ownership Trust (ESOT) was designed to bring all employees into ownership, and this scheme systematizes employee ownership. The primary purpose is to benefit the employees. Additionally, ESOTs help the company review how employees manage their shares. The company trains its employees on stock ownership.

Also, ESOT offers tax incentives for employees. Moreover, any company, either public or private, can establish an ESOT scheme as long as any other company does not control it.

Which employees can qualify for ESOT?

All employees and directors of the founding company and group company are qualified to become beneficiaries under Employee Share Ownership Trust (ESOT). However, there is an 18-month rule and a 15-year rule in this arrangement. Generally, previous employees & directors can only be eligible for ESOT for up to 18 months after they finish employment at the company. Moreover, the participation period can be raised up to 15 years according to 15 years rule but where the following criteria are met:

  • ESOT has not been set up for above 15 years.
  • The individual must have been a director or employee of the founding or group company.
  • On the date when ESOT was established, or within 9 months earlier than that date, or anytime within 5 years starting with that established date
  • during qualifying time
  • In the 5 years after the foundation of ESOT, half of the shares owned by trustees were pledged as a form of security for borrowing payments.

What is the role of Trustees in ESOTs structure?

The trustees are selected for a trust deed. There should not be less than three trustees as long as there is one corporate trustee. Three forms of the trustee are provided for:

  • Highest employee representation
  • Equal company & employee representation
  • One corporate trustee along with the board of directors included employee & company nominated directors and an experienced trustee director.

The payments received from trustees are spent for qualifying purposes in nine months.

Benefits of Employee Share Ownership Trust (ESOT)

  • Both public and private companies can use ESOT, either with or without any financing.
  • It prevents incurring funding issues that are obvious in other qualified programs.
  • ESOT is a great way to boost company growth without the need for external financing. It unites the employee benefits plan and the reduced external financing requirement, resulting in a grown cash flow.
  • It raises employee morale and encourages them to work hard & make better decisions for the company.
  • A scheme like ESOT assists in aligning the company's employees' interests with shareholders.

Tax Consequences for the Employees

Payments obtained from ESOTs are taxable. Employees won't pay income tax on shares distributed from APSS up to 12,700 or 38,100 (in certain conditions). The shares need to be owned for at least three years by the ESOT & APPS trustees to get income tax relief. Furthermore, employees will pay PRSI and USC on the share rewards.

Capital Gains Tax- CGT

If the beneficiary employee disposes of shares issued through ESOT or APSS, he will be liable to CGT. They need to report it to Revenue though no tax is owed. In addition, when the employees' shares are transferred to APSS, they must calculate the acquisition cost to calculate their capital gain. Then, subtract the shares' market value when first moving the shares from Employee Share Ownership Trust ESOT to the Approved profit sharing scheme APSS.

Related Articles