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Paying by Dividend after EOT is in place?

Setting up an EOT and would like to confirm Directors can still be paid Dividends

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We are just in the process of setting up an EOT. Company has currently 3 directors paid via PAYE/Dividend by virtue of a class of share, each director owing 1 A share. The company ownership is split between 7 shareholders (the 3 above included) with 60,000 ordinary shares between them.

The current Directors will be retiring and from the point the EOT is set up they will no longer be drawing Dividends themselves (surrendering their A share).

The intention is to set up the EOT and the new board will be paid using the award of 1 A share to allow the mix of dividend and PAYE.

The trust will own greater than the 51% required of ordinary shares (probably 100%).

The only item we cannot seem to find a definitive answer to is:

Is it allowable to have A shares used for the purpose of paying the management team via Dividends when there is an EOT in place.

Various references to it being allowed can be found but no real clarity to allow us to proceed. 

Can anybody point me in the right direction for a more definitive answer?

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By David Ex
14th Oct 2021 20:17

I’m maybe being thick but could you perhaps ask the person who put that structure in place?

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By Chris Maslin
15th Oct 2021 08:22

Yup...you need to decide what the % ownership will be tho. Ie for this purpose forget about share classes. Given its 3 of 7 remaining will they be entitled to 3/7ths of the profits, with the EOT entitled to 4/7ths?

The different share classes aren't there to enable you to pick and choose huge/tiny dividends as you see fit, but because the EOT will waive it's right to dividend, instead using its share of profits partially/entirely for profit share bonus payouts to staff.

Whichever legal team are helping you with the transition should be advising on this. If you're attempting to DIY then I worry what other mistakes you might be making.

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By HerbieM
15th Oct 2021 09:51

We are having advice on setting up the Trust but this particular aspect is not something where the advisers have experience. We have also asked two other advisors if they have any experience of this issue but again no luck.

The use of tax efficient salary structures is obviously a benefit to the company in so much as the cost to employee the new management team is greatly reduced. From that point of view its clearly in the best interests of the company and employees as it leaves more cash in the business.

While I don't see why this structure would trigger a disqualifying event it would be good to get some evidence that it is allowed and being used in other companies.

EOT's are still not that common so it's difficult to get a definitive answer.

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Replying to HerbieM:
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By Chris Maslin
15th Oct 2021 12:00

You may have an awkward circular thing. Eg one of the remaining director/shareholders knows it's tax efficient to take a lower salary, more as dividends. Dividends are of course from post CT profits, salary isn't. So it's just the salary that's considered in working out what the company profit is. That director voluntarily taking a below market value salary means more profit for the company, but only a small proportion of that will end up available as dividends to them as shareholder. Most will be extra profit for the EOT. It may therefore make sense that it makes sense they sacrifice tax efficiency on their personal remuneration for overall benefit. Remember they'll likely be entitled to a share of the EOT profit independent of any shareholding they remain...and if that's partially/completely based on salary, that may be a further reason for them individually not to go for minimal salary.

We've got a hybrid model (ie my wife and I have retained some shares but majority with EOT). I'm aware this adds complexity, and there will be some conflicts of motivation. Time will tell if it was a good move or not (we're only ~3 months post transfer), but it felt the right option at the time!

I think you'll need to find someone who knows what they're talking about re this (not me!), and have a proper chat with them and the 3 directors/shareholders who are hanging around. Ensure they understand the consequences of any plans, and that where appropriate things are factored into the sale agreement docs.

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