What Is an Employee Ownership Trust?

If you’re a business owner exploring exit options, you’ve probably come across the term Employee Ownership Trust, usually alongside discussions of favourable tax outcomes. However, the rules surrounding EOTs have changed in the last two years, so it’s important to be up to speed with the current rulings.

So, what is an Employee Ownership Trust? In short, it’s a trust that holds a controlling stake in a trading company on behalf of all its employees, giving owners a route to sell their business without a traditional external buyer.

This article answers the common question “how does an Employee Ownership Trust work”, what’s changed in the tax treatment for 2026/27, the eligibility conditions you need to meet, and how to set up an Employee Ownership Trust the right way.

How does an Employee Ownership Trust work?

Introduced in 2014 to encourage more businesses to adopt a John Lewis-style model, an Employee Ownership Trust (EOT) is a form of employee benefit trust. The trustees buy a controlling interest (i.e more than 50% of the shares) from the existing owners, generally at an independently assessed market value.

Payment is often staged: some cash upfront (sometimes funded by third-party borrowing), with the balance paid in instalments from the company’s future profits. The existing management team typically continues to run the business day-to-day, while the trustees’ role is to safeguard the long-term interests of all employees rather than manage operations themselves.

Partnerships can use the same route too, with the partners selling their interests to the trust in place of company shares.

The Tax Position for 2026/27 – what’s actually changed

This is the area where owners most need up-to-date advice, because the headline figures have moved twice recently.

Before 26 November 2025, a qualifying sale to an EOT could be structured so that the whole gain was exempt from Capital Gains Tax (CGT). That full exemption no longer applies.

For disposals made on or after 26 November 2025, only 50% of the qualifying gain is exempt from CGT. The remaining 50% is taxed at the standard CGT rate of 24% (rather than Business Asset Disposal Relief rates, BADR doesn’t apply to the chargeable portion at all). So, when you do the maths on the overall gain, it gives an effective rate of roughly 12%.

How does that compare with other exit routes for 2026/27? As things stand:

• Employee Ownership Trust – effective rate of around 12% on the qualifying gain
• Business Asset Disposal Relief (BADR) – 18%, up to the £1 million lifetime limit
• Standard Capital Gains Tax – 24%, on gains outside any relief

An EOT sale still tends to come out ahead of both alternatives for most business owners, but the margin has narrowed considerably since 2022, when the comparison was closer to 0% for an EOT against 10% for the then BADR rates.

It’s worth asking yourself: does the tax advantage alone still make an EOT the right choice for you, or does the decision now rest more on the future of your business and its people?

The October 2024 change: company contributions to the Trust

A second change, effective from 30 October 2024, is easy to miss but matters in practice. HMRC now treats a company’s contributions to an EOT as distributions – broadly, the same tax treatment as a dividend, rather than as a cost that passes through without further tax consequence.

There is a specific, claimable relief that protects contributions used to fund the qualifying costs of the acquisition itself: the share purchase price, interest on acquisition borrowing, valuation fees, and stamp duty. Crucially, this relief has to be claimed, it isn’t automatic.

Contributions made to cover the ongoing running costs of the trust, rather than the original acquisition, may still be treated as taxable distributions. Getting this claim right, and getting the funding structure right from the outset, is now a material part of setting up an EOT correctly.

The qualifying conditions

To benefit from EOT tax reliefs, a sale needs to satisfy several conditions, both at the point of sale and on an ongoing basis:

• The company must be a trading company, or the principal company of a trading group
• All employees must be eligible to benefit from the trust on broadly equal terms (differences based on pay, length of service, or hours worked are allowed)
• The trustees must acquire and retain a controlling interest – more than 50% of the shares, voting rights, distributable profits, and assets on a winding-up
• The trustees must be UK tax resident, both at the point of sale and afterwards
• The trustees must take reasonable steps to ensure the price paid doesn’t exceed market value, typically evidenced through an independent valuation
• The “40% participator” rule: the number of continuing shareholders – plus other 5%+ participators who remain directors or employees, and anyone connected to them – must not exceed 40% of the total employee headcount of the company or group

Breaching any of these conditions within four years of the disposal can lead to the relief being withdrawn retrospectively, with the exiting shareholders assessed for CGT as though the claim had never been made.

Have you checked how your own shareholder and employee structure would map against that 40% threshold?

Is an Employee Ownership Trust right for your business?

An EOT isn’t a fit for every business, and it’s worth being honest about that before getting too far into the process. It tends to work best where:

• The business is genuinely suited to broad employee ownership – culturally as well as structurally
• There’s a capable management team that can run the business independently of the founder, since the trustees themselves won’t take on day-to-day management
• The owner can accept that most, or all, of the proceeds will be deferred and paid from future profits, rather than received as a single upfront sum

If none of those apply comfortably to your business, a trade sale, management buyout, or private equity transaction may suit you better – and comparing the numbers side by side, informed by your own circumstances, is a sensible first step.

Advantages of selling your business to an Employee Ownership Trust

Beyond the tax position, owners tend to weigh up a mix of practical and cultural factors:

• An exit route where there’s no obvious external buyer, or where the owner would prefer not to sell to a competitor
• Continuity for staff, customers, and culture, since the business carries on operating largely as before
• The ability for the outgoing owner to retain some involvement, and to continue drawing a salary for any ongoing director duties
• The potential for employees to receive a tax-free bonus of up to £3,600 a year (subject to National Insurance and other conditions), with the company able to claim a Corporation Tax deduction for the cost
• Scope to combine an EOT sale with share incentive arrangements for management and key staff

Set against this: the fixed sale price means sellers don’t benefit from any future increase in value (unless they retain shares or options), a significant part of the proceeds is usually deferred, and stamp duty is payable on the share transfer at 0.5% of value.

How to set up an Employee Ownership Trust

Broadly, the process runs as follows:

1. Establish whether the business and its ownership structure are suitable, including checking the 40% participator position in advance
2. Commission an independent valuation to support a defensible market-value price
3. Set up the trust with UK-resident trustees who are independent of the exiting shareholders
4. Agree the funding structure for the purchase –  including how much is paid upfront, how much is deferred, and whether any contributions need a claim for relief under the October 2024 distributions rule
5. Seek advance clearance from HMRC where appropriate, to confirm the anti-avoidance rules won’t apply
6. Plan for the four-year period after sale during which the qualifying conditions must continue to be met

Because this touches company law, tax, valuation, and personal financial planning all at once, most owners bring in legal, tax, and corporate finance advice well before a transaction, alongside a look at how the proceeds fit into their own wider financial plan.

In summary

An Employee Ownership Trust remains one of the more tax-efficient ways to exit a UK business, and for many owners it’s about more than tax. It’s a way to protect jobs, culture, and legacy without a traditional buyer. But the numbers behind it have shifted materially over the past two years, and treating it as an automatic “CGT-free” route is no longer accurate. Understanding today’s rules, the 12% effective rate, the October 2024 distributions change, and the qualifying conditions – is the starting point for working out whether it’s the right fit for you and your business.

If you’re weighing up an EOT against other exit routes, or want to understand how the proceeds of a sale would fit into your wider financial plan, get in touch with First Wealth, we’d be glad to talk it through with you.

This document is marketing material for a retail audience and does not constitute advice or recommendations. Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested.