Employee Ownership Trusts: What business owners need to know

The 19th of June marks Employee Ownership Trust (EOT) day (yes, there really is an awareness day for everything).

This is an annual occasion to recognise the growing role of employee ownership in the UK economy.

With more than 2,400 businesses now operating through an Employee Ownership Trust (EOT) structure, it is a model that has moved firmly into the mainstream of business succession planning.

However, its popularity and the benefits that an EOT offers have attracted attention from HMRC and are changing the landscape of this model.

If you are a business owner who has looked at EOTs before or heard the phrase and wondered whether it applies to you, our team have prepared a short guide.

What is an Employee Ownership Trust?

An EOT is a structure through which a company becomes majority-owned by a trust on behalf of its employees.

The existing shareholders sell a controlling stake to the trust, which then holds those shares for the collective benefit of the workforce.

The model is sometimes described as the John Lewis approach to business ownership, thanks to the fame associated with the brand and the way it is run.

This is a bit of a misnomer, as EOTs are available to businesses of all sizes and sectors. Employees do not buy shares directly but instead, the trust acquires ownership and employees benefit through profit-sharing arrangements and a genuine stake in the company’s long-term success.

For business owners, it is a way to exit their company on their own terms, while ensuring the legacy they have built continues to operate with its culture and identity intact.

Why do business owners choose the EOT route?

While recent news and reforms have focused on the tax benefits of EOTs, there are many reasons why they have become an increasingly popular exit option:

• Business continuity – Unlike a trade sale, an EOT transaction does not disrupt day-to-day operations. There is no new external owner to impose a different direction or brand identity.
• Protecting your legacy – Many founders are motivated not just by the financial outcome but by what happens to the business afterwards. An EOT gives reassurance that the company, its people and its values will be preserved.
• Avoiding the complexity of a trade sale – Third-party sales often involve protracted negotiations, warranties, indemnities and earn-out arrangements. An EOT can provide a cleaner, more straightforward transition.
• Employee engagement – Profit-sharing arrangements under an EOT structure tend to improve motivation, retention and productivity, which are benefits that support the business during and after the transition.
• Tax efficiency – EOT sales continue to offer CGT relief that is not available on most other types of disposal, though the rules have recently changed.

What has changed? The 2025 Budget and CGT relief

Until November 2025, one of the most significant attractions of selling to an EOT was the ability to claim 100 per cent Capital Gains Tax relief on qualifying disposals.

Put simply, qualifying business owners could sell their shares to an EOT and pay no CGT on the gain.

That has now changed and for disposals completing on or after 26 November 2025, the relief has been halved.

50 per cent of the gain is now exempt from CGT, while the remaining 50 per cent is subject to tax at the individual’s prevailing CGT rate.

Importantly, Business Asset Disposal Relief (BADR) and Investors Relief (IR) cannot be used alongside EOT relief to reduce the chargeable portion further.

For higher-rate taxpayers, the effective CGT rate on an EOT sale is around 12 per cent, still considerably lower than the 24 per cent that applies to most other business disposals or the 18 per cent BADR rate that applies from April 2026.

The 2025 Budget also introduced a requirement for trustees to take all reasonable steps to ensure the price paid for shares does not exceed market value, making a robust and defensible business valuation more important than ever.

Despite the reduction in relief, EOTs remain a competitive exit option from a tax perspective.

The change brings them closer to other routes but does not eliminate the advantage and it does nothing to diminish the non-financial benefits that attract many owners to this model of succession or exit in the first place.

Is an EOT right for your business?

An EOT is not the right answer for every business owner. The model tends to work best where there is a strong management team capable of running the company following the transition, as well as a workforce with genuine engagement in the business.

This model of exit tends to be favoured by owners whose priorities extend beyond maximising the headline sale price.

The process itself involves several important steps, including:

• Obtaining a credible and HMRC-compliant valuation of the company shares.
• Preparing financial forecasts to demonstrate that the business can meet the deferred consideration over time.
• Working with specialist advisers to structure the transaction correctly from both a tax and legal perspective.

Getting the valuation right is particularly critical, as it must be defensible to HMRC and fair to both the selling shareholders and the employees who will ultimately become responsible for the company going forward.

How SGD can help with Employee Ownership Trusts

Our team advises business owners on all aspects of EOT transactions, from the initial feasibility assessment through to the completion of the sale and any tax planning beyond.

We can help you understand whether an EOT is the right exit route for your circumstances and support you and your employees through every stage of the process.

If you are thinking about your exit options and want to explore whether employee ownership could be the right fit, we would be glad to have a conversation. Get in touch with our team today.