UK
Ireland
Employee Ownership Trusts (EOTs)
Benefits of employee ownership
A well-structured sale to an EOT can also offer significant short-term and long-term advantages, including no capital gains tax (CGT) to pay for the individual selling shareholders provided relief requirements are met at the time of sale and for the following four tax years:
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Smooth exit strategy
Enables business owners to exit without a traditional third-party buyer
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Tax-free disposal
UK individual shareholders can sell shares to the trustee free from capital gains tax.
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Incentivising key talent
Post-sale employee share incentive schemes are not ruled out, provided the relief requirements can be preserved.
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Shared vision & values
Aligns employee and stakeholder goals for long-term success.
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Boosts morale & retention
Proven to enhances employee engagement and reduce staff turnover.
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Drives innovation
Empowers staff at all levels to contribute ideas and improvements.
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Performance growth
Encourages a culture of ownership that supports business growth.
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Tax advantages for all
Owners benefit from CGT relief; employees can receive tax-free bonuses.
Funding an EOT
Typically, an EOT sale is structured as follows:
- The existing shareholders sell their shares to the EOT
- A portion of the consideration may be paid upfront, using available funds within the company or through external borrowing
- The remaining balance of consideration is usually structured in the form of loan notes and paid in instalments over time
- To facilitate these payments, the company can make tax-free contributions from its trading profits to the EOT, enabling the trust to meet its obligations to the selling shareholders
- Compared to a sale to a third-party buyer, such as a trade purchaser or private equity investor, an EOT sale is often simpler and more streamlined. It also allows employees to acquire ownership indirectly and without personal financial investment, making it an attractive solution for succession planning
The EOT relief requirements
Transitioning to employee ownership via an EOT offers substantial tax benefits. However, several conditions (including those introduced in Finance Act 2025) must be met and maintained for approximately four years post-sale, to preserve this relief. These include ensuring the former owner does not retain control, that the EOT trustees are UK-resident and that the sale price reflects market value, among other compliance requirements which are set out below:
Trading requirement
The company whose shares are transferred must be a trading company or the principal company of a trading group
This is likely to exclude companies or groups with “passive” businesses, such as property investment or rental businesses, or companies with large cash deposits in excess of working capital. Companies such as these may be required to undergo pre-sale restructuring
All-employee benefit requirement
The trust must operate for the benefit of all eligible employees on equal terms
Shareholders who sold 5% or more of the share capital of the company are excluded. These “non-beneficiaries” can, however, continue to be directors of the company after the sale and can continue to receive an arm’s length remuneration package, in addition to the sale proceeds for their shares
Trustee independence requirement
Broadly, the selling shareholders or family members must not make up a majority of the EOT trustees
Controlling interest requirement
The EOT must acquire and retain a controlling interest (at least 51%) in the company
Consideration requirement
The EOT trustee must ensure the sale price and any interest on deferred payments are fair and commercially reasonable
Limited participation requirement
The proportion of selling shareholders (i.e. employees, employed family members, directors) should not exceed 40% of the company’s total employee population
No related disposal requirement
There should not have been any previous disposals of company shares to an EOT
UK-resident trustee requirement
The EOT trustee(s) must be UK resident
How we can help
At S&W, we understand that every business is unique. That’s why we take the time to get to know you, your goals, and your team. From initial planning and feasibility assessments to implementation and beyond, we’re here to guide you through every step of the EOT journey. Our support doesn’t end at the point of sale, we also provide ongoing post-transaction governance support to help ensure the long-term success of your employee-owned business and empower your team to thrive in their new roles.
We also work closely with a network of trusted legal advisers and professional trustee firms, ensuring you benefit from expert guidance at every stage of the process.
In addition to acting as lead advisers to implement and project manage the sale process on selling your business to an EOT, we can support with the following:
- Conducting feasibility assessments to determine whether an EOT is right for your business
- Designing and delivering shareholder and employee education and engagement programmes
- Acting as lead advisers to implement and project manage the sale process
- Providing valuation services
- Offering personal tax planning and compliance support for selling shareholders
- Managing accounting and tax compliance for the EOT trustee
- Advising on the accounting treatment of the transaction
- Supporting post-sale bonus planning and share scheme design
- Advising on the impact of upcoming reforms to the tax treatment of EOTs
Latest insights
Article
New tax relief rules for EOTs: What trustees and employee-owned companies need to know
The way distributions from trading companies to employee ownership trusts (EOT) are taxed changed from 30 October 2024. Learn more about the new provisions and how to claim income tax relief.
Frequently asked questions
What are EOTs?
Employee Ownership Trusts (EOTs) are a government initiative enabling business owners to sell shares to a trust, without incurring capital gains tax. Rather than individual shareholding, the trust holds a controlling stake in the company on behalf of staff, fostering long-term engagement and shared success.
Since the introduction of tax reliefs in 2014, employee ownership has become a more accessible and attractive option for business succession. In addition, employees of companies owned by an EOT may be eligible to receive income tax-free bonuses of up to £3,600 per year.
It is also possible to transfer ownership of partnerships — including Limited Liability Partnerships (LLPs) — to an EOT without triggering CGT. However, as the reliefs apply only to the sale of company shares, the partnership would first need to be incorporated. This incorporation can typically be structured on a tax-neutral basis, with no immediate income tax or CGT consequences.
How does an EOT work?
An EOT is a structure that allows the original shareholders of a trading company to sell a majority stake (over 50%) to the trustees of a special discretionary trust set up for the benefit of all eligible employees.
Broadly, instead of shareholders receiving dividends, eligible employees typically benefit through profit-sharing funded by gifts from the trading company. Since the trust usually has no funds at the outset, the purchase is often structured using deferred consideration / loan notes payable to the selling shareholders over time.
The EOT is designed as a long-term ownership model to preserve the company’s culture, boost employee motivation, and reduce absenteeism. To qualify for tax reliefs, certain statutory relief requirements must be met at the time of sale and maintained for the following four tax years.
What happens when an employee leaves an employee-owned company?
When an employee leaves the company, provided they had more than 12 months of continuous service, they may still be eligible to benefit from the EOT subject to the terms of the trust deed and discretion of the trustees.
Businesses should also consider whether employees leaving the company will affect them satisfying the ‘Limited Participation’ requirement. This requirement dictates that the number of employees and directors (together with their connected parties) who hold, or have rights entitling them to acquire, a 5% interest in any class of shares in the Company cannot exceed 40% of the total number of employees of the Company. Failure to met this condition could be a disqualifying event for EOT purposes.