Employee Ownership Trusts (EOT) explained
An Employee Ownership Trust (EOT) is a popular succession planning option for UK business owners. But what is an employee ownership trust, and how does one work in practice?
In this guide, we cover what an employee ownership trust is, how it works, and the key pros and cons of this ownership model, so you can decide whether it’s right for your business.
Contents:
- What is an Employee Ownership Trust?
- Who manages an Employee Ownership Trust?
- How does an Employee Ownership Trust work?
- What are the qualifying conditions for EOT tax relief?
- Employee Ownership Trust Benefits
- Employee Ownership Trust Disadvantages
- Is an Employee Ownership Trust right for your business?
What is an Employee Ownership Trust?
An employee ownership trust is a legal structure that enables a company to be owned indirectly by its employees via a trust. It’s established to hold a controlling stake in a company on behalf of all employees for their long-term benefit.
To qualify as an EOT:
- The trust must hold at least 51% of the company’s shares
- The trust operates for the benefit of all eligible employees
- Ownership is collective rather than individual
Importantly:
- Employees do not directly own shares
- The employee ownership trust becomes the majority shareholder
- The company continues to be managed by its board of directors
Understanding what an employee ownership trust is essential before considering whether it fits into your succession plans.
Who manages an Employee Ownership Trust?
An employee ownership trust is overseen by appointed trustees. These trustees are responsible for ensuring the trust operates in the best interests of the employees as beneficiaries.
For an employee ownership trust to qualify under HMRC rules, the seller must give up ultimate control by allowing the trust to own 51% or more of the shares and voting rights.
The board of directors continues to run the business day-to-day, but strategic oversight sits with the trust structure.
How Does an Employee Ownership Trust Work?
Employees will have a significant financial interest, as well as a voice, in the company and will benefit from its future value. As a result, they are incentivised to contribute to the long-term success of the business, often leading to improved engagement, job satisfaction, and productivity.
In practice, the EOT acquires a controlling stake in the company and holds those shares on behalf of all eligible employees.
The board of directors continues to manage the business day-to-day, while the trust acts as the majority shareholder for the benefit of the workforce.
What is the Structure of Employee Ownership Trusts?
If you sell your business to an Employee Ownership Trust, you will retain full control of the sale process and are not reliant on an external buyer with their own ideas about how they want the transaction to unfold.
There are still some legal and regulatory requirements to consider, but typically far less due diligence takes place than in a traditional trade deal.
As a result, an EOT transaction is often more collaborative in nature, provided it is structured correctly and supported by appropriate valuation and advice.
How is an Employee Ownership Trust Funded?
As employees do not buy shares or contribute funds into the trust, sale proceeds are usually funded by the company itself.
Some of the consideration may come from existing cash reserves, with the balance funded through debt, either externally raised or structured as loan notes. These loan notes are commonly repaid from the company’s future profits, often at a preferential interest rate.
Because funding is frequently linked to future performance, realistic forecasting and sustainable debt levels are essential when assessing whether an employee ownership trust is suitable.
What are the qualifying conditions for EOT tax relief?
HMRC requires strict criteria to be met for an employee ownership trust to qualify for tax relief.
The seller must not retain control of the board of directors or the EOT itself. The trust must hold at least 51% of the company’s shares and voting rights.
All employees must be able to benefit from the employee ownership trust on broadly equal terms, although new hires with less than 12 months’ service can be excluded.
Certain individuals must also be excluded from benefitting from the trust. Specifically, those who own, or are entitled to acquire, at least 5% of the shares in the company. Close connections of those individuals – such as their children or spouse/civil partner – must also be excluded.
Because the tax advantages of an employee ownership trust depend on meeting these qualifying conditions, careful structure and compliance are essential.
Employee Ownership Trust Benefits
When weighing up the employee ownership trust pros and cons, the benefits are often what make this structure attractive to business owners. You can read more about the benefits of an EOT sale in our full guide.
Employees do not require their own funding
Employees do not directly become shareholders themselves. Instead, the Trust holds the shares collectively on their behalf. As a result, staff do not take on personal debt, making employee ownership accessible, without financial risk to individuals.
This collective model is one of the main EOT benefits to employees.
There is no haggling over price
An independent valuation is typically arranged, and the price is agreed between the seller and the trustees of the employee ownership trust. This should reflect fair market value and broadly align with what a third party might pay.
Since the valuation is agreed before completion, there’s generally less uncertainty than in a traditional sale, where offers may be revised following due diligence.
Substantial tax benefits
One of the most significant advantages of an employee ownership trust is the potential tax relief.
Qualifying EOT sales can be free from Capital Gains Tax (CGT). Under the rules introduced in the 2025 Budget, CGT may be payable on 50% of the disposal gain if the exemption does not apply, with the CGT rate currently up to 24%. Employees may also receive tax-free bonuses (subject to statutory limits).
However, the employee ownership trust must be structured correctly and meet all HMRC requirements. If the qualifying criteria are not satisfied, the tax relief can be withdrawn, making accurate implementation critical.
Employee Ownership Trust Disadvantages
When weighing up the employee ownership trust pros and cons, it’s important to recognise that there are risks as well as benefits.
Because EOT transactions are often funded through future company profits, the seller’s financial outcome can be linked to the business continuing to perform well. In practice, this means you should consider:
- Deferred payments that depend on future profitability
- Increased borrowing, which can affect cash flow
- Not receiving the full sale price upfront
- The need for clear leadership and communication during the transition to employee ownership
For that reason, it’s important to assess cash flow forecasts, management strength, and long-term sustainability before deciding whether an employee ownership trust is the right route.
Is an Employee Ownership Trust right for your business?
In summary, an Employee Ownership Trust is a structure that enables business owners to transfer control to employees collectively through a trust, while potentially benefitting from significant tax relief.
However, deciding whether an employee ownership trust is right for your business requires careful consideration of:
- Valuation
- Funding structure
- Governance
- HMRC compliance
- Long-term financial sustainability
Understanding the pros and cons of Employee Ownership Trusts in the context of your specific objectives is essential before committing to this route.
Professional tax and corporate finance advice are typically required to structure the transaction correctly and ensure HMRC compliance.
If you’re considering selling your business to an employee ownership trust, taking advice early can help you evaluate whether the structure aligns with your financial objectives and long-term plans.
You can learn more about how we support business owners throughout the sale process on our sell a company page, or contact us for a confidential discussion about whether an EOT is right for you.