Set up an Employee Ownership Trust

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 a popular succession route: there are over 2,470 employee-owned businesses in the UK.

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 (50% of the gain on sales from 26 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 an EOT with other routes

A trade sale qualifying for Business Asset Disposal Relief pays 18% CGT on the first £1 million of lifetime gains from 6 April 2026 (14% in 2025-26), and a trade sale without it pays 24% on higher-rate gains. On an EOT sale from 26 November 2025, 50% of the gain is relieved immediately and 50% is deferred until the trustees sell. On a £2 million gain, EOT relief could save over £200,000 in CGT compared with a standard disposal at 24%.

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

An EOT is the better choice if you want to exit the business entirely and receive CGT relief, with employees benefiting without using their own money. Other schemes suit you better if you are not planning to sell and want to retain key employees (EMI), encourage a saving culture (SAYE) or reward all employees while keeping control (SIP).

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.

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

• Monitor and document that the trust keeps a controlling interest of 51% or more.
• Make sure the company continues to trade.
• Make sure the trust continues to benefit all eligible employees on the same terms.
• Confirm your Trust Registration Service details annually, or update them within 90 days of a change.
• Hold regular trustee 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.

Common mistakes to avoid

• Rushing the process. Allow at least 3-6 months, because poorly structured EOTs may not qualify for relief.
• Using a generic template, when the trust deed must be tailored to qualify for relief.
• Overvaluing the business. Since October 2024, trustees must ensure consideration does not exceed market value.
• Letting former owners control the trust. More than half of the 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, whose engagement is crucial to a successful transition.