There are more exit options for business owners than most realise. A trade sale is the obvious one, a management buy-out another. But there is a third route that is regularly overlooked, even by owners it would suit well: selling to an Employee Ownership Trust (EOT).
Introduced in 2014, EOTs have become a more familiar succession planning option for owners who want to exit, preserve the business, and benefit from significant tax advantages. They are not right for every company. But particularly for profitable ”people” businesses with surplus cash, they can be an effective way to achieve a tax efficient exit and incentivise staff without selling to a third party.
This article explains how EOTs work, what changed in 2024 and 2025, and what you should think about if you are considering one.
What Is an Employee Ownership Trust and How Does It Work?
An Employee Ownership Trust is a trust set up to hold a controlling interest (more than 50%) in a company on behalf of its employees. Employees do not become shareholders themselves. The trust holds the shares collectively, and individual employees are not required to invest or take on financial risk in the way they would if buying shares directly.
The purchase price is agreed between the sellers and the EOT trustees. It is important to value a business independently before agreeing that figure. Part of the price is paid on completion, with the selling shareholders receiving the balance of the sale proceeds over time, funded by the company’s future profits. Any existing debt needs to be factored into the structure alongside the purchase price.
The company must be a qualifying trading company. Investment and non-trading businesses are excluded. The trust must hold a controlling interest, and all eligible employees must be able to benefit on broadly equal terms, although the legislation allows trustees to distinguish between employees by reference to length of service, hours worked and remuneration.
The conditions are specific, and the consequences of getting them wrong are significant. Before taking any steps toward a business sale of this kind, instruct a solicitor and an accountant with experience in EOT transactions.
EOTs as a Succession Planning Option
For many owners, the appeal of an EOT goes beyond tax. It is about what happens to the business after they leave.
When you sell to a third party, you hand over complete control of what comes next. An EOT can offer a different outcome. It is important to understand that the Sellers cannot retain a controlling shareholder interest however, they can still sit on the company’s board and have an active role in the management and future direction of the business. For many founders, that matters just as much as the price.
An EOT brings other benefits. Compared to a management buy-out, an EOT does not require the leadership team to raise finance or take on personal risk. Compared to a trade sale, it does not depend on finding the right buyer at the right time. Thinking carefully about your business exit strategy means looking at all the options, not just the most familiar ones.
The Tax Benefits
The tax position is often what prompts owners to look at EOTs seriously. And it is not hard to see why.
Where qualifying conditions are met, sellers can claim Capital Gains Tax (CGT) relief on the disposal. From 26 November 2025, that relief changed. Previously a full CGT exemption, it now covers 50% of the gain. The remaining 50% is chargeable at the standard CGT rate, currently reducing the effective CGT exposure for many higher-rate taxpayers compared to a conventional trade sale. However, Business Asset Disposal Relief (BADR) and Investor Relief cannot be used alongside the 50% CGT relief for EOTs, so sellers should consider and fully understand their tax position before proceeding.
There is also a benefit on the employee side. Once owned through an EOT, the company may pay employees an annual bonus of up to £3,600 free of income tax, subject to qualifying conditions. This figure has remained unchanged since the regime was introduced in 2014, despite calls for it to be increased in the 2025 Budget.
None of these outcomes are guaranteed. Your accountant needs to assess the tax position and your solicitor needs to ensure the legal structure reflects the intended treatment before anything is agreed. If you have EMI Share Option Schemes in place, it is also worth discussing with your advisers how they interact with an EOT.
The Rule Changes and What They Mean for You
The EOT rules have changed twice in quick succession, and both sets of changes matter.
From 30 October 2024, former owners and their connected persons can no longer retain director or indirect control of the EOT after completion. More than half of the trustees must be independent of them. Sellers still sit on the trust board, but they cannot hold a majority of voting rights.
Trustees must also be UK residents as a single body of persons at the time of sale. A breach of any of these conditions can result in the loss of CGT relief. Trustees must take reasonable steps to ensure shares are not overvalued, and the clawback period has been extended from 1 year to 4. If the EOT conditions are breached after completion, HMRC can recover the CGT relief for up to 4 tax years following the year of disposal.
From 26 November 2025, the CGT relief for sellers was reduced from 100% to 50% with no BADR or Investor Relief available.
Specialist legal and tax advice has always been important for EOT transactions. Given the pace of change, it is now essential.
Pros and Cons: An Overview
An EOT is not the right answer for every business. It is worth being clear about both sides before you go further.
The CGT relief is still significant, the structure supports continuity, and it offers an exit that does not depend on finding a buyer at the right moment. But the purchase price is paid over time so Sellers remain exposed to future performance. The business therefore needs a capable management team to carry it forward if the owner managers who sell their shares to the EOT no longer want an active role in the business.
Is an EOT Right for Your Business?
There is no single answer. It depends on your business, your team, and what you want from an exit. What is clear is that an EOT deserves proper consideration, not a quick dismissal because it is less familiar than a trade sale.
Speaking to an employee ownership trust solicitor early is the most effective first step. They can tell you quickly whether your business is likely to qualify and what the process would involve.
Frequently Asked Questions
The trust must acquire more than 50% of the ordinary share capital. You do not have to sell all of your shares and some owners retain a minority stake after completion. But the trust must hold the controlling interest for the structure to qualify.
Can I sell only part of my business to an EOT, or does it have to be the whole company?
The trust must acquire more than 50% of the ordinary share capital. You do not have to sell all of your shares and some owners retain a minority stake after completion. But the trust must hold the controlling interest for the structure to qualify.
How is the business valued for an EOT sale, and who decides the price?
An independent valuation is usually obtained before the price is agreed. Since the 2024 rule changes, trustees must take reasonable steps to ensure shares are not overvalued, so the valuation needs to be commercially realistic as well as technically sound.
What happens if the company cannot keep up the repayments to the former owners?
The sale price is funded by the company and its future profits, so if the company underperforms, deferred consideration payments to the sellers may be delayed or reduced. That is one of the main differences between an EOT sale and a trade sale, where a larger proportion of the sale price is more often paid on completion. Your advisers should model realistic financial scenarios with you before you proceed.
Can I still work in the business and draw a salary after the sale?
Yes. Sellers often remain involved as directors, employees or consultants after completion. What has changed under the 2024 rules is the level of control they can retain over the trust itself. Any continuing role needs to be documented carefully in the transaction.
How long does an EOT transaction typically take?
Most transactions take around 3 to 6 months, although more complex businesses can take longer. The timeline depends on the company structure, the valuation process, and how quickly the legal and tax points are resolved.
Speak to JPP Law
JPP Law advises business owners across England and Wales on business exits and company sales, including EOT transactions.
If you are considering an EOT, book a free consultation with a commercial lawyer. We can talk through the structure, the tax points and the practical steps involved, so you can decide whether it is the right exit route for you.
This article is for general information only and does not constitute legal or professional advice. The law may have changed since this article was published. You should always seek professional advice before taking action.
