Employee Ownership Trust: How an EOT Works, the Tax Relief, and When It's the Wrong Exit

An employee ownership trust (EOT) is a way of selling your business to your employees, collectively, through a trust that holds the shares on their behalf. Sell a controlling interest to a qualifying EOT and the gain is free of capital gains tax. The price is usually paid out of the company’s future profits over several years, which is the part most owners don’t think hard enough about.

This is for owners of established, profitable businesses who’ve been told about EOTs by an accountant or a friend who did one, and want the version that includes the risks. I own and invest in businesses and I’ve sat on more than 20 boards; I’m not an EOT adviser, and you’ll need a specialist for the deal. What I can give you is the owner’s view of whether it’s the right deal in the first place.

How an employee ownership trust works

1. A trust is set up, with trustees, to hold shares for the benefit of all the employees.
2. You sell a controlling interest (more than 50%) of your company to the trust, at an independently valued market price.
3. The trust usually has no money of its own, so the company funds the purchase: a contribution to the trust each year out of profit, which the trust passes to you as the former owner. Some deals use bank debt to pay part of the price up front.
4. The employees don’t own shares directly and don’t pay anything. They benefit through the trust: a say in how the business is run, and tax-free bonuses.
5. You can stay on, as a director or an employee, and keep up to 49%, but you can’t control the company or the trust after the sale.

In plain terms: you’re selling the business to itself, and being paid from the profits it makes without you.

The tax relief, and its conditions

The headline is a 0% rate of capital gains tax on the sale of shares to a qualifying EOT, against 18% on the first £1m of gains with Business Asset Disposal Relief and 24% above that in 2026/27. On a £2m sale, that’s the difference between keeping all of it and giving up several hundred thousand pounds.

The conditions, in outline:

• The company must be a trading company (or the parent of a trading group), not an investment company.
• The trust must end up with a controlling interest: more than half the shares, votes and rights to profits.
• The trust must be for the benefit of all employees on broadly the same terms. It can vary by pay, hours or length of service, but it can’t pick favourites.
• Limited participation: if the people who already hold 5% or more of the shares make up too large a share of the workforce, the relief doesn’t apply. It’s designed for genuine employee ownership, not a family of three.

The rules were tightened in the Autumn Budget of October 2024. Trustees must be UK resident; former owners and people connected to them can’t control the company through the trust after the sale; the trustees must take reasonable steps to make sure they’re not paying more than market value; and if the conditions are broken, the relief can be clawed back from you for four tax years after the year of sale, up from one. The tax-free bonus for employees is up to £3,600 per employee per year, and since the 2024 changes it can be paid to employees without having to include directors.

Those are the rules as I understand them at the time of writing. They change with each Budget. Confirm every one with a tax adviser before you sign anything.

How you actually get paid, and why that’s the catch

This is the owner’s question, and it’s the one the glossy case studies skip.

In a trade sale, a buyer pays you, mostly on completion, with their money. In an EOT, the company pays you, over time, with its own profit. If the business makes £400,000 a year after tax and you’ve sold it for £2m, you’re looking at five years or more of payments, and every one of them depends on the business still making £400,000 without you running it.

So three things have to be true at once:

1. The profit has to be real and repeatable. Not one good year. Buyers’ due diligence is thorough because it’s their money; with an EOT, you’re the lender, so you do the due diligence on yourself.
2. The business has to grow without you. If it stalls when you step back, the payments stop. I’ve said this about every exit route and it’s doubly true here: a business that needs you isn’t an asset, it’s a job, and you can’t sell a job to the people doing it.
3. The management team has to be able to run it. An EOT is a management buyout without the management putting any money in. The ones that work have a capable managing director and a senior team in place before the sale, not after.

If those three aren’t true, the tax saving is a distraction. 0% of a payment that never arrives is nothing.

When an EOT is the right exit

• You want the business to carry on, with its name, its people and its culture, and a trade buyer would strip it.
• There’s no obvious trade buyer, or the ones there are would pay less than it’s worth.
• You have a management team who can run it and employees who’d stay for it.
• You’re comfortable being paid over several years from profit, and you don’t need all the money on day one.
• You want to step back gradually rather than hand over the keys on a Friday.

When it’s the wrong one

• You need the money out now, for a house, a divorce, a retirement or the next business.
• The business depends on you for the customers, the know-how or the decisions.
• Profit is thin or lumpy, so the payments would be too.
• You’d struggle to let go. Legally you can’t control it afterwards; emotionally, plenty of former owners try, and it ends badly for everyone.
• You’re doing it for the tax relief rather than for the business. HMRC’s changes in 2024 were aimed at exactly that.

In those cases a trade sale, a management buyout with proper funding, or simply keeping the business and building it to grow without you may pay you more and sooner. I compare the routes in business exit planning.

What to do before you talk to an adviser

1. Know what it’s worth. The business valuation calculator gives you adjusted EBITDA times a multiple, and shows what the business running without you adds. The trust will need a formal valuation; you need a realistic one first.
2. Run the ugly cash flow. Put the annual payment to you into the 13-week cash flow forecast and the bad and ugly versions. Can the business pay you and still invest, hire and survive a quiet quarter?
3. Build the team you’d sell to. If you wouldn’t lend them £2m today, don’t sell them the company on credit. Succession planning comes before the EOT, not after.

Questions owners ask

Do employees pay for the shares? No. The trust buys them, funded by the company’s profits (and sometimes bank debt).

Can I keep working in the business after an EOT? Yes, as a director or employee on a market salary. You can also keep a minority stake. You can’t control it.

Is the £3,600 bonus tax-free? Free of income tax, up to £3,600 per employee per year. National insurance still applies.

How long does an EOT sale take? Typically a few months once the valuation and the funding are agreed, but the preparation, a management team that can run it and clean, repeatable profit, is years of work, and it’s the part that decides whether you get paid.

I’m Dr Lewis Haydon, a business coach and mentor in Birmingham, UK. I own and invest in businesses, and I work with owners of established businesses from about £250k turnover, scaling to £1m and on to £20m, including the ones building a business someone else can run so they can exit on their terms. If you’re weighing an EOT and want an owner’s view before the advisers’ fees start, bring it to a virtual coffee.