Guide

Set up an Employee Ownership Trust

How to sell your business to an Employee Ownership Trust (EOT). Covers CGT relief conditions, structure requirements, the setup process, and ongoing compliance for EOT-owned companies.

UK-wide

An Employee Ownership Trust (EOT) is a way to sell your business to your employees without them paying anything directly. The trust holds shares on behalf of all eligible employees, and you receive significant Capital Gains Tax relief on the sale.

EOTs are becoming increasingly popular as a succession route. There are now over 2,470 employee-owned businesses in the UK. This guide explains how EOTs work, the tax benefits, and the steps to set one up.

Why consider an EOT?

An EOT may be right for you if:

  • You want to exit while preserving the company culture and jobs
  • You want employees to share in the company's future success
  • There is no obvious buyer or family successor
  • You want significant CGT relief (still 50% from November 2025)
  • You are comfortable with payment over several years from company profits

EOTs are not right if you need full payment immediately, want to maximise sale price regardless of buyer, or the company cannot fund the purchase from future profits.

CGT relief for selling to an EOT

The main tax benefit of selling to an EOT is Capital Gains Tax relief. From 26 November 2025, this relief has reduced but remains substantial compared to other disposal routes.

Comparing EOT with other exit routes

To understand the tax advantage, compare EOT relief with alternatives:

  • Trade sale with BADR: 14% CGT (April 2025), rising to 18% (April 2026) on first £1m of lifetime gains
  • Trade sale without BADR: 24% CGT on higher rate gains
  • EOT sale (from November 2025): 50% of gain relieved immediately, 50% deferred until trustees sell

On a £2 million gain, EOT relief could save over £200,000 in CGT compared to a standard disposal at 24%.

Qualifying conditions for EOT relief

To claim CGT relief, both your company and the trust must meet specific conditions. These have become stricter since October 2024.

The 4-year clawback period

If the qualifying conditions cease to be met within 4 tax years after the sale, HMRC can claw back the CGT relief. This was extended from 1 year in October 2024. Situations that could trigger clawback include:

  • EOT sells shares, reducing holding below 51%
  • Company ceases to trade
  • Trust ceases to benefit all employees on same terms
  • Trustees become non-UK resident

Proper ongoing compliance is essential to protect the relief.

Who can and cannot benefit

EOT benefits must be available to all eligible employees on the same terms. However, some people are specifically excluded.

The exclusion of 5%+ shareholders prevents EOTs being used primarily to benefit the selling owners. If you held significant shares, you cannot also receive distributions from the trust.

Tax-free bonuses for employees

One of the ongoing benefits of EOT ownership is the ability to pay tax-free bonuses to employees.

Administering tax-free bonuses

To pay qualifying bonuses:

  1. Confirm the company meets all EOT requirements (trading, 51%+ EOT-owned)
  2. Calculate bonus using permitted variations (pay, service, hours)
  3. Pay via payroll - do not deduct income tax (up to £3,600 limit)
  4. Deduct employee and employer National Insurance as normal
  5. Keep records demonstrating same-terms compliance

The bonus cannot replace regular salary. If an employee receives more than £3,600, only the amount over the limit is taxable.

Setting up an EOT: the process

Establishing an EOT typically takes 3-6 months and involves several professional advisers. Do not rush the process - poorly structured EOTs can fail to qualify for relief.

  1. Assess if EOT is suitable

    Consider your exit goals, company profitability, and ability to fund the purchase over time. Compare with trade sale or management buyout alternatives.

  2. Engage specialist advisers

    Appoint solicitors with EOT experience, a corporate finance adviser, an independent valuer, and an accountant. Check if they are Employee Ownership Association members.

  3. Obtain independent valuation

    Commission a professional valuation on fair market value basis. From October 2024, trustees must ensure consideration does not exceed market value.

  4. Structure the transaction

    Decide on immediate payment versus deferred consideration. Most EOTs pay the seller over 3-7 years from trading profits.

  5. Establish corporate trustee

    Incorporate a trustee company (usually limited by guarantee). Appoint trustees - more than half must NOT be former owners or connected persons.

  6. Draft legal documents

    Prepare EOT trust deed, share purchase agreement, loan agreements, amended articles. Do not use generic templates for the trust deed.

  7. Apply for HMRC clearance (recommended)

    Submit advance clearance application confirming qualification for CGT relief. Include transaction details, valuation, and draft trust deed.

  8. Communicate with employees

    Inform employees about the transition to employee ownership, how it works, governance structure, and benefits including tax-free bonus eligibility.

  9. Complete the transaction

    Execute documents, transfer shares to trustee company, register at Companies House, make initial payment if applicable.

  10. Register trust and file returns

    Register with HMRC Trust Registration Service if required. Claim CGT relief on your Self Assessment return.

Trust deed requirements

The trust deed is the EOT's constitution. It must contain specific provisions to qualify for CGT relief.

Ongoing compliance after setup

Once the EOT is established, you must maintain the qualifying conditions to protect the CGT relief and continue paying tax-free bonuses.

Annual requirements

  • Maintain 51%+ ownership: Monitor and document controlling interest
  • Keep trading: Company must continue trading activities
  • All-employee benefit: Trust must continue to benefit all eligible employees on same terms
  • Trust Registration Service: Confirm details annually or update within 90 days of changes
  • Trustee meetings: Hold regular meetings (typically quarterly) with documented minutes

Document what you do

Keep records of trustee decisions, beneficiary lists, distributions made, and compliance monitoring. HMRC can enquire into the relief claim for several years after the disposal.

Comparing EOT with employee share schemes

EOT is one of several ways to give employees a stake in the business. The right choice depends on your objectives.

When EOT is better: You want to exit the business entirely and receive CGT relief. Employees benefit without using their own money.

When other schemes are better: You want to retain key employees (EMI), encourage saving culture (SAYE), or reward all employees while keeping control (SIP). You are not planning to sell.

Common mistakes to avoid

  • Rushing the process: Allow 3-6 months minimum. Poorly structured EOTs may not qualify for relief
  • Using generic templates: The trust deed must be tailored to qualify for relief
  • Overvaluing the business: From October 2024, trustees must ensure consideration does not exceed market value
  • Former owners controlling the trust: More than half of trustees must not be former owners or connected persons
  • Ignoring ongoing compliance: Relief can be clawed back for 4 years if conditions cease to be met
  • Not communicating with employees: Employee engagement is crucial for successful transition

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