Since their introduction by the UK government in 2014, Employee Ownership Trusts (EOT) have grown considerably in popularity as an exit strategy. In this blog, we will outline everything you need to know about EOTs, including how they work, how they are structured, and who they benefit.

What is an EOT?

Commonly abbreviated as “EOT”, an Employee Ownership Trust is a special type of trust that is set up to hold the shares in a company for the benefit of ALL employees. It is, in effect, a model of indirect employee ownership.

The employees do not own the shares themselves, which is an important distinction. They do, however, enjoy a number of the benefits of business owners, including influence over corporate strategy and direction, and a share of company profits.

Employee Ownership Trusts: The key characteristics

• An EOT is a trust that holds a controlling stake (more than 50%) in a company.
• The trust is set up for the benefit of every employee, regardless of seniority or salary.
• Trustees are assigned to manage the shares held in the trust in accordance with the best interest of the team.
• There are significant tax advantages for the exiting shareholders, subject to some strict conditions. The most notable of these is a 0% Capital Gains Tax charge for the seller.
• EOTs are widely associated with altruistic business owners who wish to safeguard their legacies as entrepreneurs, and ensure their staff are protected from the uncertainty that often follows the sale of a business.

EOT qualifying rules

To receive all the benefits of an EOT transaction, particularly the tax breaks, you must meet a strict set of criteria, which is summarised below:

• The company must be either a trading company or the main company of a trading group.
• You must sell a controlling stake of the company to the EOT (i.e. more than 50% of the shares).
• All employees must be beneficiaries of the trust.
• The number of former owners remaining at the company (while owning at least 5% of it) must not account for more than 40% of total employees.

What are the benefits of an EOT?

The reason why Employee Ownership Trusts continue to grow in popularity is the unique set of benefits that the route offers. This type of transaction not only benefits the exiting shareholders, but also the staff who remain, as well as the business itself. Below are some of the key benefits of an EOT.

The seller

When you sell a controlling stake of your business to an EOT, and all the right qualifying conditions are met, you gain the following benefits:

• 0% Capital Gains Tax on the sale
• Selling shares to a trust below market value normally triggers an Inheritance Tax (IHT) charge. If you sell to an EOT, you are exempt from this.
• You are guaranteed to receive the full market value for the shares that you sell to an EOT (subject to independent valuation).
• You get certainty of exit, meaning your deal won’t be compromised by a trade buyer changing their mind or delaying proceedings.
• You can exit knowing your employees will be looked after and protected from restructuring/redundancies that are sometimes associated with buyouts.

The employees

Since the EOT gives employees an indirect ownership stake in the company, there are obviously some new benefits that they will enjoy too.

• As of 2025, employees of a company owned by an EOT can receive annual bonuses of up to £3,600 tax free. And this is ALL employees. These bonuses must be paid by the company, not the trust.
• Employees will have a legitimate voice in how the business is run going forward.

Business health and performance

For the right company, an EOT may also be very good news with regards to future performance. Studies by the Employee Ownership Association have found that employee-owned companies…

• are more profitable and efficient,
• have happier, more productive and better paid staff,
• have a strong local community presence,
• have better governance and decision-making,
• are more sustainable and have more ethical practices, and
• have greater resilience against economic downturns.

How does an Employee Ownership Trust work?

While an excellent option for the right companies, transferring ownership of a company to an EOT is not a simple process. It requires considerable expertise to be done properly, and errors can be costly later on.

The steps involved with a sale to an EOT

The following is a simple outline of the EOT process; however, the reality may be much more complex depending on your business and its characteristics.

1. Valuation: First, you will need to ascertain the value of your shares. This is especially important for an EOT, as the seller is guaranteed to receive the true market value for their shares, subject to independent valuation and other conditions.
2. Determine suitability: Despite its benefits, the EOT route will not be right for every business. It is essential to determine suitability as soon as possible, considering things like your company structure, goals, team size, and your aims as an exiting shareholder.
3. Setting up the EOT: The EOT is created through a trust deed, which must clearly describe the conditions of the EOT, as well as its appointed trustees and beneficiaries (which must be all employees).
4. Due Diligence: It is crucial that proper due diligence is carried out on both the legal and financial situation before the transaction. This will help you understand the risks and liabilities involved and should prevent any nasty surprises later.
5. Funding the EOT: The EOT must be able to purchase the shares, and it must therefore acquire funding. There are several options here, including raising finance, or using surplus cash from the company’s balance sheet. It is also common for the EOT to repay the former owners via deferred consideration (repaying in instalments over a longer period).
6. Communication: It is essential that the transition is clearly explained to the employees, including the benefits and implications.
7. Establish governance: Clear decision-making processes and other governance structures must be set up to ensure the EOT is a success.

Recent changes to how EOTs work

In 2023, the UK government launched a consultation to review the EOT tax benefits and qualifying criteria. They were concerned that some shareholders were opting for the EOT route as primarily a tax vehicle, not for the genuine benefit of their employees.

Skip forward to late 2024, and some key changes were announced to EOT rules, which you now need to be aware of.

• The exiting shareholder cannot maintain control of the EOT and the business after the sale has gone through.
• EOT trustees must be UK resident at the time of disposal.
• The price of company shares cannot exceed the fair market value, as determined by an independent valuation.
• Additional information will need to be provided to HMRC in order to claim the relief from Capital Gains Tax, so qualified tax advice is essential.
• Company directors can now be excluded from the tax-free bonuses for employees; previously they had to be included.
• Company contributions to the EOT to pay the former owners are treated as a distribution (a payment made by a company to its shareholders). A new tax relief will reportedly be introduced to prevent income tax being charged on this.

If the government’s EOT rules are not followed - both during and in the years following the transaction – the tax benefits of the EOT route will be lost. This is why it is so important to seek qualified accounting, tax, and legal advice when embarking on an EOT sale.

Be aware: There is a tax recovery period of four years

The government has recently introduced new rules relating to EOTs and how they are operated. One of these is an extension of the vendor clawback period from two years to four years.

In other words, this means that the government can recover tax from the exiting shareholders (the ones who enjoyed a 0% CGT charge) if any EOT rules are broken within four years of the transaction.

That might sound scary, but it’s an easy situation to prevent if the right advice is sought.

Would you like to learn more about Employee Ownership Trusts?

EOTs are a really exciting opportunity for the right businesses and owners. If you’re thinking about your next step, maybe a new venture, or perhaps retirement, we strongly recommend looking into how suitable an EOT may be for you.

If you have any questions about how EOTs work, or how it may apply to your situation, please contact Gravitate Corporate Finance today.