Employee Ownership Trusts
An employee ownership trust offers a way to sell your business while keeping it owned for the benefit of its employees. We help you assess whether this approach suits your succession plans.
Employee Ownership Trusts
After years spent building a business, you may want it to continue under the people who helped you build it. Those employees may be happy to carry on, but unwilling or unable to pay for your shares. An Employee Ownership Trust (EOT) buys the shares for their benefit, with the owner usually paid over time from company profits after wages and other business costs have been met.
Where a shareholder sells a controlling stake in their business to an EOT and qualifying conditions are met there can be significant tax advantages. This can make EOTs useful in succession planning as an alternative to an external sale, a private equity backed buy-out or a management buy-out (MBO).
Tax relief on selling to an EOT
For disposals to an EOT made on or after 26th November 2025, 50% of the gain is potentially exempt from CGT and 50% is chargeable, but the chargeable part doesn’t qualify for Business Asset Disposal Relief (BADR) or Investors’ Relief.
The exempt 50% is deducted from the trustees’ tax acquisition cost of the shares. Where the remaining half is taxed at 24%, this gives an effective CGT rate of 12% before losses and allowances.
Qualifying conditions
The main conditions include:
- The trustees of the EOT must be UK tax resident.
- The company must be a trading company or the principal company of a trading group.
- The trust must benefit all eligible employees on the same terms, subject to statutory exclusions. Benefits can vary according to pay, length of service or hours worked.
- The EOT must acquire a controlling interest in the tax year of the qualifying disposal and retain it at the year end.
- The trustees of the EOT must take reasonable steps to ensure the consideration doesn’t exceed market value, typically by obtaining an independent professional valuation they can rely on.
- The statutory 40% limit on shareholder participation must be met.
- Exiting shareholders (or persons connected with them) must not retain control of the company post-sale by controlling the EOT.
If the EOT conditions are breached within four years of the end of the tax year in which the disposal was made, relief will be withdrawn and the exiting shareholders will be assessed to CGT as if the claim hadn’t been made.
Employee benefits and practical considerations
A qualifying EOT-owned company can pay employees bonuses of up to £3,600 each per tax year free of Income Tax. National Insurance still applies, and the bonus must meet separate qualifying conditions.
For the owner, the employee ownership trust pros and cons depend heavily on how the purchase is funded. It may allow the business to remain independent, but deferred payments rely on its future performance. The company must be able to afford those payments and still have enough left to operate and invest.
Before committing to an EOT, you need to know how much the business can afford to pay you, who will run it and whether the arrangements qualify for relief. We can work through these questions with you before you agree the terms of a sale.
If you want your employees to continue the business when you retire, speak to us about whether an EOT would work.
Get in touch to speak to an expert today
Get in touch today and speak to a member of the Tax Innovations team.
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