What is an Employee Ownership Trust – and Is It Right for Your Business?

An employee ownership trust (EOT) is a legal structure that allows a business owner to sell their company to their employees, with partial exemption from Capital Gains Tax. Introduced through the Finance Act 2014, EOTs have grown in popularity as a succession route for UK owner-managed businesses. The rules around EOTs have evolved since their introduction, most notably with a reduction in the CGT relief available to sellers from 26 November 2025, and tighter governance requirements that took effect from 30 October 2024. In this guide, we share exactly how an EOT works, the tax advantages available in light of recent CGT changes, and the pros, cons, and common pitfalls to be aware of.

What is an employee ownership trust?

An employee ownership trust is a type of trust that acquires a controlling interest (more than 50%) in a trading company. It holds these shares collectively on behalf of all employees. It is not the same as employees receiving shares directly, as the trust holds the shares on their behalf. This gives employees a genuine stake in the business and a share of its success without the complexity of individual share ownership. The model was inspired by the John Lewis Partnership, with the EOT structure drawing on the principle that a business run for the benefit of its people tends to be more engaged, resilient, and productive. Importantly, the business continues to operate as normal after the sale. The existing management team stays in place, the company trades as it always has, and there is no disruptive change of ownership. The seller exits, or steps back gradually, and the employees become the collective beneficiaries of the company’s ongoing performance.

How does an employee ownership trust work?

Step 1 – Agree a sale at market value

First, the sale price must be agreed after an independent valuation. Unlike a conventional sale, the price cannot be set freely between buyer and seller. It must reflect the genuine, independently assessed market value of the business via independent valuation. This is key for HMRC compliance and to ensure the repayment schedule is realistic for the business to sustain.

Step 2 – Set up the trust and appoint trustees

A trust is created, governed by a trust deed that sets out how it will operate and how employees will benefit. Appointed trustees, typically a mix of independent trustees and employee representatives, are responsible for acting in the interests of all employees as beneficiaries of the trust.

Step 3 – The company funds the purchase price over time

The seller does not receive the full purchase price upfront from a third-party buyer, so who funds an employee ownership trust? The company itself funds the purchase by paying profits to the trust over a period of, typically, five to seven years, depending on the business’s financial position. There is an inherent element of risk here: if the business underperforms, payments may take longer or, in extreme cases, may not be fully realised.

Step 4 – Employees benefit through profit sharing and bonuses

Once the trust is established, the company may pay tax-free bonuses to employees of up to £3,600 per person per year, free of income tax. The employee ownership trust tax free bonus is one of the most tangible benefits of the EOT model for the workforce and plays a meaningful role in driving engagement and performance. Once the seller has been fully repaid, those profits flow more freely to employees as a direct reward for the company’s success.

What are the tax benefits of an employee ownership trust?

The following employee ownership trust tax benefits are worth consideration:

Capital Gains Tax exemption for the seller

When the EOT regime was introduced in 2014, qualifying sellers paid zero Capital Gains Tax on the full gain. However, this changed from 26 November 2025, when the Autumn Budget 2025 reduced the CGT relief from 100% to 50%. The Government’s rationale was that the cost of the relief had grown far beyond what was anticipated when it was introduced. However, despite the reduction, a sale to an EOT continues to offer a materially lower effective CGT rate than many alternative exit routes.

Since the reduction, when a qualifying business owner now sells their shares to an employee ownership trust, 50% of the gain on the sale is exempt from Capital Gains Tax. Importantly, the main rate of CGT on business disposals stands at 18% and 24% following the October 2024 Budget, with the lower rate applying to gains falling within the basic rate band, and the higher rate applying to gains above it.

Furthermore, Business Asset Disposal Relief (BADR), which previously offered a reduced 10% rate up to a £1 million lifetime limit, now applies at 18% from April 2026. As such, on a £3 million business, the CGT saving through an EOT sale could be £300,000 or more. This is a significant sum that would otherwise leave the business with tax payments in a conventional trade sale.

Tax-free employee bonuses

EOT-owned companies can pay each eligible employee a bonus of up to £3,600 per year, free of income tax. National Insurance contributions still apply, but the income tax saving is meaningful for employees across all salary levels. To illustrate the scale of this: a company with 30 employees could distribute £108,000 in bonuses every year on a tax-free basis. Over a five-year period, that is £540,000 in value delivered directly to employees. This makes EOTs a powerful retention and motivation tool that directly reflects the commercial success the team has helped to create.

Stamp Duty on the share transfer

Unlike some corporate transactions, there is no specific Stamp Duty exemption for a sale of shares to an EOT. Stamp Duty is payable at a standard rate of 0.5% on the value of the shares transferred. However, this cost is treated as a qualifying acquisition cost for tax purposes. This means that these payments are generally not treated as taxable distributions. In practice, the cost instead forms part of the overall transaction cost funded by the business.

It is also worth noting the Inheritance Tax position. EOT-owned shares are not subject to the normal trust IHT charges, including the ten-year anniversary charge that typically applies to assets held within a discretionary trust. For those with inheritance tax planning considerations, this is a further advantage worth discussing with your adviser.

EOT eligibility – does your business qualify?

The good news is that the majority of UK owner-managed trading companies meet the core eligibility requirements. The conditions are not onerous, but they must be satisfied at the point of sale and maintained afterwards. The key conditions are:

• The company must be a trading company, or the holding company of a trading group; purely investment businesses do not qualify.
• The EOT must acquire a controlling interest, at least 51% of the ordinary share capital, assets, and voting rights.
• The former shareholders with a more than 5% interest in the company must not make up more than 40% of the total workforce after the sale. In other words, significant owners cannot then dominate the employee base.
• All employees must be eligible to benefit from the EOT on equal terms.
• However, trustees can take into account factors such as length of service, hours worked, and remuneration when allocating bonuses.
• The company must not be controlled by another company at the time of the EOT acquisition.

If you are uncertain whether your business meets these conditions, the first step is a conversation with an adviser who can assess your specific structure.

Recent changes to EOT governance requirements

The rules around EOT governance were also tightened from 30 October 2024. Two specific changes are relevant for anyone setting up a new EOT or reviewing an existing one.
First, all trustees of an EOT must now be UK residents. Non-resident trustees no longer satisfy the conditions for the relief. Second, former owners or persons connected with former owners cannot form a majority on the trustee board. This prevents a situation where the selling shareholder retains effective control of the trust after the sale.

These changes were introduced to protect the integrity of the regime and ensure EOTs reflect true employee ownership rather than being used primarily as a tax planning vehicle. If you have an existing EOT where the trustee composition does not comply with the updated rules, this should be reviewed promptly.

If you are uncertain whether your business meets the qualifying conditions, the first step is a conversation with an adviser who can assess your specific structure.

Timing your EOT transaction

With CGT now payable on 50% of the gain, the timing of transaction completion takes on greater significance. CGT is normally due on or before 31 January following the end of the tax year in which the sale completes. Business owners who structure completion early in a new tax year can maximise the time available to receive deferred consideration instalments before the CGT payment falls due.

For example, completing on or after 6 April 2026 rather than before 5 April 2026 gives an additional twelve months before the tax becomes payable. It is also possible to agree a CGT instalment plan with HMRC in certain circumstances, though specialist advice should always be sought on this.

Employee ownership trust pros and cons

For business owners who want to exit cleanly, avoid a lengthy trade sale process, and leave their business in good hands, while saving a substantial amount of tax in the process, an EOT is a genuinely compelling option. For those who need a large lump sum upfront, or whose business is not currently profitable, it is likely not the right fit.

Common EOT problems – what to watch out for

EOTs are popular, but they are not without their complications. The following are the issues we see arise most commonly:

• Unrealistic valuations: Since the purchase price must reflect genuine market value, there is sometimes a temptation to push valuations higher than a commercial buyer would accept. HMRC can challenge an inflated valuation, and a price set above what the business can realistically service through its profits creates a repayment burden that may prove unsustainable. A genuinely independent valuation is essential.
• Governance transition: Many business owners underestimate the governance implications, particularly where family members or long-standing directors are appointed as trustees without a clear understanding of their duties, or where the October 2024 residency and majority composition rules have not been considered. Getting this right from the outset matters.
• HMRC compliance risk: The CGT exemption is only available if the conditions are satisfied at the point of completion and maintained thereafter. If HMRC subsequently challenges the structure, the tax relief could be withdrawn. Thorough legal and tax advice at every stage is essential.
• Deferred payment risk: The seller is reliant on the business performing well enough to fund the deferred consideration payments. If the business hits a difficult trading period after the sale, payments may be delayed or, in the worst case, may not be fully received. Sellers must understand this risk clearly before proceeding.
• Employee expectation management: Employees often interpret ’employee ownership’ as meaning they will receive direct financial benefits immediately. The trust structure means benefits are indirect until the seller has been repaid, and even then, bonuses are discretionary. Clear, honest communication with the workforce is critical.

How is the business valued in an EOT?

HMRC requires that the purchase price paid by the EOT reflects the genuine market value of the business at the time of sale. This figure must be independently supported and defensible to HMRC. For most trading businesses, market value is determined using an EBITDA (earnings before interest, tax, depreciation and amortisation) multiple. This is a multiple of the company’s maintainable profits, adjusted for the specific characteristics of the business and the sector it operates in. The appropriate multiple will vary considerably depending on the nature of the business, its growth trajectory, customer concentration, and market conditions.

As such, independent employee ownership trust valuations are important for two reasons. First, it ensures HMRC compliance; an inflated valuation is a red flag and creates meaningful risk. Second, it ensures the repayment obligation is realistic. We would be happy to discuss how to value your business as part of a wider succession planning conversation.

EOT vs trade sale and management buyout – how do they compare?

For business owners exploring their exit options, it’s worth understanding how an EOT compares to a trade sale and a management buyout (MBO).

A trade sale typically delivers the highest upfront cash consideration and may attract a premium from a strategic buyer. However, it involves a longer, more disruptive process, introduces significant uncertainty around confidentiality and staff continuity, and the seller has no control over what happens to the business after completion.

A management buyout keeps the business within the existing leadership team and can preserve continuity and culture in a similar way to an EOT. However, the management team must be able to finance the purchase, and the transaction can be complex to structure. For more information on how MBOs work, see our complete guide to management buyouts.

An EOT is usually the right choice when the owner wants to exit without a formal sale process, values the legacy and culture of the business, does not require the full consideration upfront, and wants a meaningful tax advantage. The right route ultimately depends on your business, management team, financial circumstances, and what you want your exit to look like.

Is an employee ownership trust right for your business?

So how do you decide if an EOT is right for you? This structure is likely to be a strong fit if most of the following apply to you:

• Your business is profitable and generating consistent cash flow; the repayment model depends on it.
• You do not need a large lump sum upfront; you can afford to receive the sale proceeds over a period of years.
• You have a management team capable of running the business without you at the helm day-to-day.
• You care about what happens to the business and the people in it after you leave.
• You want to avoid the disruption and uncertainty of a trade sale or private equity process.
• The CGT saving is commercially meaningful to you, and given the 2024 Budget changes, for most business owners, it will be.

The best decision starts with an honest conversation about your business, your timeline, and what you actually want your exit to look like. HB&O works with business owners across the Midlands to explore the full range of exit options, including EOTs, management buyouts and third-party sales. We will help you identify the route that makes the most sense for your individual situation. If you would like to explore whether an employee ownership trust could be right for you, we would be glad to assist. Talk to our succession planning team today to get started.

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Phone: 01926 422292