Understanding Employee Ownership Trusts (EOTs)

Discover how Employee Ownership Trusts work, their tax benefits, funding options, and why more business owners are choosing this succession route.

What is an Employee Ownership Trust (EOT)?

An Employee Ownership Trust (EOT) is a unique business structure where a controlling interest in a company is held on behalf of its employees. Introduced by the UK Government in 2014, EOTs offer a tax-efficient way for business owners to sell their company while safeguarding its future and rewarding the people who help it thrive—its workforce.

This model has grown in popularity among founders looking for a succession plan that avoids private equity or trade sales, while keeping the company independent and values-driven.

Why Choose an EOT?

EOTs offer a number of compelling benefits for business owners, employees, and the business itself:

Capital Gains Tax (CGT) Relief

Vendors who sell a controlling stake (more than 50%) to an EOT can benefit from a complete CGT exemption on qualifying disposals. This can make it a more attractive alternative to traditional sales routes.

Employee Incentives

Businesses owned by an EOT can pay income tax-free bonuses of up to £3,600 per employee per year, providing an attractive benefit to the workforce.

Cultural Continuity

Unlike external sales that can shift a company’s focus, EOTs help preserve company culture, values, and independence—often increasing staff engagement and retention.

Succession Planning

EOTs offer a structured and gradual way for business owners to exit, often allowing them to remain involved during the transition period to ensure stability.

How Does an EOT Work?

At its core, an EOT is a trust set up to own a company for the long-term benefit of its employees. The process generally follows these steps:

Establish the Trust – A new EOT is created with appointed trustees.
Agree a Valuation – An independent valuation is usually needed to establish a fair sale price.
Fund the Purchase – This can be done using:
- Cash reserves
- A loan from the outgoing owner (vendor finance)
- A third-party bank loan
Transfer Control – The trust acquires a controlling stake (more than 50%) in the company.
Engage Employees – A representative employee council or similar structure is usually set up to ensure ongoing engagement and communication.

Who Can Benefit from the EOT Bonus?

Companies owned by an EOT can pay tax-free bonuses (up to £3,600 per employee annually) if specific conditions are met, including:

The bonus must not replace regular salary.
The company must be trading, not a service company leasing staff to others.
At least 60% of employees must benefit equally.
Directors and related individuals must not make up more than 40% of staff.

While these bonuses are income tax-free, National Insurance Contributions (NICs) still apply.

What Happens to the Previous Owner?

There’s no legal requirement for the owner to step down immediately after selling to an EOT. In fact, many stay involved for a time to support a smooth transition and help the business succeed—especially where a deferred payment arrangement is in place.

Are Employees Involved in the Process?

Legally, there’s no obligation to involve employees in the sale to an EOT. However, businesses that do involve their workforce—whether through consultation, representative councils or direct communication—tend to perform better post-transition.

Involving staff can increase trust, engagement and motivation—delivering the very cultural benefits EOTs are designed to promote.

What If Something Goes Wrong?

Certain events can cause the EOT structure to lose its tax-advantaged status, such as:

The trust no longer holding a controlling interest.
Employee participation rules not being met.
The company ceasing to trade.
Trustee actions that don’t align with the all-employee benefit principle.

If a “disqualifying event” occurs in the same or following tax year as the EOT sale, CGT relief can be clawed back from the original vendor. After that period, the clawback responsibility falls on the trust itself.

Real-World Examples of EOTs

A growing number of successful businesses have embraced employee ownership. Some well-known examples include:

Richer Sounds

Founder Julian Richer transferred 60% ownership to staff and gifted £1,000 for every year of service.

John Lewis

Perhaps the most famous EOT model in the UK, John Lewis & Waitrose are fully employee-owned.

Aardman Animations

The creative force behind Wallace and Gromit opted for EOT ownership to remain independent.

Mott MacDonald

A major global engineering consultancy with thousands of employee-shareholders.

Is an EOT Right for Your Business?

Employee Ownership Trusts can be a highly effective and rewarding exit route, especially for business owners looking to:

Protect the legacy of their business
Reward loyal employees
Exit in a tax-efficient manner
Avoid the disruption of private equity or trade sale

Final Thoughts

If you’re exploring your options for selling or restructuring your business, an EOT could be a strategic and ethical choice that benefits everyone involved.

Contact Franks Accountants today to find out whether an Employee Ownership Trust is the right move for your business.

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