is an employee ownership trust right for your business?

Article written by Jon Sparkes, Tax Director, Westcotts

An increasing number of businesses have been switching to employee ownership models in recent years, with many owners viewing a sale of their shares to an Employee Ownership Trust (EOT) as a viable and tax-efficient succession option. With the potential for no Capital Gains Tax (CGT) to be payable, if conditions are met, the EOT route can offer an attractive combination of financial benefit and cultural continuity.

what is an eot?

An EOT is a trust that holds company shares for the benefit of all employees. Politically, EOTs have been encouraged through the offer of tax incentives to both sellers and staff, the aim being to promote business continuity and culture as well as greater employee engagement, with the hope of boosting motivation and productivity along the way.

EOTs have been given tax-advantaged status, much like other employee share schemes, because they are seen as a means of spreading ownership more widely, keeping successful businesses rooted in their local communities and protecting jobs. For business owners who want to pass on their legacy rather than sell to a third party, that can be a compelling message.

tax advantages

The most significant advantage is Capital Gains Tax relief. When an individual sells shares to an EOT, the disposal is treated as “no gain/no loss”, meaning no CGT is payable if the detailed qualifying conditions are satisfied. This can represent a major saving compared with private equity or trade sales.

By contrast, disposals that qualify for Business Asset Disposal Relief (BADR) are capped at £1 million gains in the lifetime of an individual and currently taxed at 14%, rising to 18% from April 2026. Gains above that cap attract CGT at 24%. Against that backdrop, the EOT’s full exemption looks extremely generous.

Employees also benefit. They can receive annual bonuses of up to £3,600 tax free, further aligning their interests with the success of the company.

key conditions

Relief is only available if strict rules are followed:

• The EOT must be UK resident and hold a controlling interest in the company.

• The company must be trading or the parent of a trading group.

• All employees must be eligible beneficiaries of the EOT, although bonuses can reflect salary or service length. Former owners (who previously held more than 5% of the shares in the company) and connected parties are excluded.

• Trustees must ensure the purchase price and any interest rates on deferred payments are at market rates, usually requiring professional valuation.

• The number of continuing shareholders must not exceed 40% of the total workforce and former owners (or people connected with them) must make up less than 50% of the trustee board.

These conditions must remain satisfied for the rest of the tax year and the following four years, or the original CGT relief could be clawed back.

funding the deal

Most EOT transactions are funded by the company’s own profits. Typically, a combination of existing reserves and future earnings is used, with the trust repaying the purchase price to the selling shareholders over time from company cashflow.

The company can contribute funds to the EOT to cover expenses such as valuations, stamp duty, interest and other reasonable costs without tax consequences. However, it is generally inadvisable to pay these costs by way of dividends to the trust, as such dividends are taxed heavily at trust income tax rates. Structuring the funding correctly therefore makes a real difference to long-term affordability.

practical issues

While the tax relief is attractive, several real-world challenges need consideration:

• Future profits: Exiting shareholders rely on the company remaining profitable to ensure full payment for their shares. This can burden the business and affect employee morale.

• Minority stakes: If a seller retains shares, future disposals to the EOT will not qualify for CGT relief.

• Management incentives: Unlike traditional management buy-outs, EOTs spread benefit across all employees, limiting flexibility to reward senior staff. Share options, for example Enterprise Management Incentive (EMI), or bonuses may be used but need careful structuring.

• Eventual sale: If the EOT later sells the company, tax treatment is less favourable – the trust pays CGT and employee distributions are taxed as earnings. The model is designed to encourage long-term ownership, not quick exits.

in summary

EOTs are an attractive succession route, primarily because of CGT relief and cultural benefits. But they are not suitable for every business. Owners must consider future profitability required to fund deferred consideration, trustee independence, management strength and ongoing compliance.

Other options, such as management buy-outs, trade sales or private equity, may take longer and result in higher tax bills but could deliver better long-term returns and flexibility. Ultimately, succession planning should balance tax with the commercial realities and cultural fit for business.

It is a classic case of not letting the tax tail wag the proverbial commercial dog.