Employee ownership demystified: Direct, indirect and everything in between

Whether through direct shareholding, indirect ownership via an Employee Ownership Trust (EOT), or a hybrid of both, the way employees participate in the success of their companies is changing.

With recent tax reforms and heightened regulatory scrutiny, understanding the nuances of each model is more important than ever. 

We explore the key features, benefits and trade-offs of direct, indirect and hybrid ownership structures, helping business leaders and employees navigate the new terrain with clarity and confidence.

The Finance Act 2025 has reshaped the landscape for business owners considering a sale, particularly to an EOT. New rules now demand stricter trustee independence, UK residency for trustees and longer CGT clawback periods. These changes raise the bar for due diligence and structural clarity in transitions to employee ownership.

Meanwhile, direct ownership is also under pressure. From 6 April 2025, CGT rates rose to 18% for basic rate and 24% for higher and additional rate taxpayers. Furthermore, Business Asset Disposal Relief (BADR), which applies to the first £1 million of qualifying gains, increased to 14%, with a further rise to 18% in 2026 already announced. These shifts make traditional exits less tax efficient.

These changes also impact tax advantaged share plans such as the Enterprise Management Incentive and Company Share Option Plan, which are often used by companies to incentivise and retain employees, as a company moves towards an exit.  

As succession planning becomes more strategic, understanding the differences between direct, indirect and hybrid ownership is essential.

Employees personally own equity in the business, giving them individual shareholder rights such as voting and potential dividends.

From the employee's perspective, share ownership offers several advantages. These include the potential for financial gains if the company performs well, a stronger sense of ownership and alignment with company goals and possible dividend income that may be more tax-efficient than salary. Specific plans also provide favourable tax treatment at acquisition and sale. However, employees face risks such as financial exposure if the company underperforms, lack of investment diversification and potential liquidity issues if shares are restricted or hard to sell. Additionally tax implications can be complex, especially for non-tax-advantaged schemes.

From the employer's perspective, offering share ownership can enhance recruitment and retention by positioning the company as employee-friendly, while also serving as a performance incentive that aligns employee interests with company success. It can be a cash-flow-friendly compensation method and help build a culture of shared success. Some arrangements may also offer corporation tax reliefs. On the downside, issuing shares can dilute existing shareholders, and managing such schemes can be administratively demanding due to legal and regulatory requirements. Employers also need to manage employee expectations, particularly if share values decline, and be cautious of encouraging a short-term focus on share price over long-term strategy.

Shares are held in a special type of trust on behalf of all employees.

From the employee's perspective, Employee Ownership Trusts (EOTs) offer several appealing benefits. Employees can gain ownership-related advantages without needing to invest their own money, and they may receive annual bonuses of up to £3,600 tax-free. EOTs also tend to support job security and foster a more inclusive and engaged workplace culture, allowing employees to share in the company’s success. However, employees do not hold individual shares or voting rights, limiting their direct control and influence. Additionally, the trust structure can be complex and may not be fully transparent or easily understood by all employees.

From the employer's perspective, EOTs provide a valuable succession planning tool, enabling founders to exit in a way that aligns with company values. They can enhance employee engagement, morale and retention, while also offering significant tax benefits such as a CGT exemption for sellers. On the downside, setting up an EOT can be legally and administratively complex, with ongoing compliance requirements to maintain tax advantages. Financing the sale often involves the company funding the trust, which can lead to prolonged cash outflows. Moreover, managing governance and balancing trustee responsibilities with employee interests can be challenging.

A hybrid ownership structure combines elements of all of the above and can include majority-ownership through an EOT, while allowing key employees to hold shares directly or through tax advantaged share plans (such as EMI or CSOP). These models offer flexibility, allowing key individuals to hold direct equity while the broader workforce benefits from collective ownership and profit-sharing through the trust or tax-advantaged share schemes.

When designed well, hybrid arrangements can balance control, reward and inclusivity, aligning incentives across different employee groups. However, they require careful legal and tax planning to avoid unintended tax consequences, conflicting governance rights or dilution of value. As hybrid models grow in popularity, especially in scaling businesses and professional services firms, clarity in structure and communication is essential to ensure they deliver on their promise of shared success. 

Each of these structures offer distinct advantages and trade-offs. The right choice depends on your strategic objectives, timeline and appetite for complexity.

To explore your options or discuss how these models could support your goals, please get in touch with our team.