Selling a business to an Employee Ownership Trust

Most owners picture selling to a competitor, a larger group or an individual buyer. An Employee Ownership Trust is a different kind of exit: the business is sold to a trust that holds it for the people who already work there, and the price is normally paid out of the business's own future profits.

It has been a popular route for owner-managed companies since the tax relief was introduced in 2014, and the rules have changed twice recently. From 30 October 2024 the conditions were tightened. From 26 November 2025 the relief itself was cut to half the gain. Anything you read about EOTs written before those dates may describe a deal you can no longer do.

What an Employee Ownership Trust is

An Employee Ownership Trust, or EOT, is a trust set up to hold a controlling interest in a trading company for the benefit of all of its employees. Employees do not own shares individually. The trust owns them, and the trustees run the trust in the employees' interest.

A typical transaction looks like this:

1. The trust is established

   A trust deed is drawn up that meets the statutory requirements, with trustees who satisfy the independence rules. Often the trustee is a company set up for the purpose, with a board including an independent trustee and employee representatives.

2. The shares are valued

   An independent valuation establishes a market value for the shares. The trustees need to be satisfied the price does not exceed it.

3. The trust buys a controlling stake

   The owners sell more than half of the shares, often all of them, to the trust. Most of the price is left outstanding as a debt owed by the trust to the sellers.

4. The company pays the sellers over time

   Each year the company contributes part of its profits to the trust, and the trust uses them to pay the deferred price until it is cleared.

The company keeps trading throughout, usually with the same management team. The sellers often stay on as directors, at least for a period, because they are frequently the people best placed to run it while the price is being paid.

The Capital Gains Tax relief, and what changed

The relief is the reason most EOT sales happen. It has changed materially.

For disposals on or after 26 November 2025, half the gain is exempt. The other half is your chargeable gain for Capital Gains Tax in the ordinary way. The exempt half is held over and reduces the trustees' base cost, so it comes into charge if the trustees ever sell the shares.

Business Asset Disposal Relief is not available alongside it. HMRC's guidance is explicit that neither Business Asset Disposal Relief nor Investors' Relief can be claimed on a disposal where EOT relief has been claimed. The chargeable half is therefore taxed at your normal Capital Gains Tax rates, not at the 18 per cent Business Asset Disposal Relief rate.

That changes the comparison with a trade sale considerably. Before, the choice was between paying no Capital Gains Tax on an EOT sale and paying at a reduced rate on a trade sale. Now an EOT sale produces a real tax bill, and depending on the size of the gain, a trade sale using Business Asset Disposal Relief on the first £1m may not be far behind. It is a calculation to run with your own numbers, and the answer varies by seller. Our guide to the tax on selling a business covers the trade sale side.

The conditions for relief

The legislation sets out eight relief requirements. In plain terms:

• Trading requirement. The company must be a trading company or the holding company of a trading group.
• All-employee benefit requirement. The trust must benefit all eligible employees on the same terms. It can distinguish by pay, length of service or hours worked, but it cannot favour a chosen group.
• Controlling interest requirement. By the end of the tax year of the sale, the trust must hold more than 50 per cent of the ordinary share capital, have a majority of the votes, and be entitled to more than 50 per cent of the distributable profits and of the assets on a winding up, with nothing in the company's arrangements that could take that away without the trustees' consent.
• Limited participation requirement. The proportion of the company's employees who are significant shareholders, or connected with one, must not exceed two fifths, tested over the twelve months to the sale and for the rest of that tax year. This is what stops a company whose staff are mostly its owners using the relief.
• Trustee residence requirement. The trustees must be UK resident, taken together as a single body.
• Trustee independence requirement. Former owners and people connected with them must be fewer than half of the trustees, and must not control the trust through powers under the deed.
• Consideration requirement. The trustees must take all reasonable steps to ensure they pay no more than market value for the shares.
• Related disposal requirement. If you, or someone connected with you, claimed the relief on shares in the same company or group in an earlier tax year, a later disposal does not qualify. In effect the relief is available in one tax year per company or group, so the whole sale to the trust should be planned to happen in that year.

The last four of those bullets are where the October 2024 changes landed, and they are the ones owners most often need to adjust their plans for.

The October 2024 changes in more detail

The changes announced at the Autumn Budget 2024 apply to disposals to an EOT made on or after 30 October 2024.

UK resident trustees. The trustees must be UK resident as a single body. The rule does not apply to trusts established before that date, and a mix of UK and non-UK trustees can still work where the settlor was UK resident when the trust was set up.

Former owners cannot control the trust. Previously, a common arrangement left the selling owners as the majority of the trustee board, which meant they had sold the company for tax purposes while still controlling it in practice. That is no longer possible. Former owners and connected persons must be fewer than half of the trustees, and powers such as appointing or removing trustees, changing beneficiaries or directing how trust property is used cannot sit with them, unless they can only exercise those powers with the consent of trustees who are not former owners.

Market value. The trustees must take reasonable steps to make sure they are not paying more than market value. In practice that means an independent valuation, trustees who are genuinely satisfied with it, and a record showing why. A price set by the sellers because it is what they hoped for is precisely what the rule is aimed at.

A longer clawback period. If the trust stops meeting the conditions after the sale, the relief can be withdrawn from the seller. That exposure now runs to the end of the fourth tax year after the tax year of disposal, so a seller carries the risk of the trust's conduct for several years after they have stopped controlling it.

More information on the claim. A claim for relief must now include information on the sale proceeds and the number of employees.

How an EOT pays for the business

The trust almost never has money of its own. It pays because the company pays it.

The usual structure is vendor funding. The sellers agree a price, receive a portion at completion if the company has cash to spare, and leave the balance outstanding as deferred consideration. The company then makes contributions to the trust from its profits over the following years, and the trust passes them on to the sellers.

The October 2024 changes introduced a specific relief so that company contributions to an EOT to cover its set up costs and to repay the sellers are not treated as distributions for income tax purposes, which clarifies a point that had caused uncertainty. The mechanics of how the money moves still need care, and should be settled with an adviser before the deal is signed.

Three consequences follow for a seller:

• You are paid out of future profits you no longer control. If trading deteriorates, the payments slow or stop. You are, in effect, an unsecured lender to a business you have sold.
• The deferred price is taxed up front. Capital Gains Tax on the chargeable half of the gain is based on the full agreed price at the time of the sale, not on the instalments as they arrive. The tax bill can arrive well before most of the money.
• The company's cash is committed. Profits that would have funded growth, investment or a bad year go to paying you, and the management team needs to be comfortable with that.

Some transactions reduce the deferred element with bank or other third party finance, paying the sellers more at completion in return for the company taking on external debt. That shifts risk from the sellers to the company and its lender.

What employees receive

Employees do not get shares. What they get is a company run for their benefit rather than for an owner's, and in many EOT-owned companies a share of the profits once the sellers have been paid.

There is also a specific income tax exemption: a company controlled by a qualifying EOT can pay qualifying bonuses of up to £3,600 per employee per tax year free of income tax, although not free of National Insurance. Since 30 October 2024, directors can be excluded from those bonuses without breaking the rule that the bonus scheme must cover all eligible staff on the same terms.

When an EOT suits, and when it does not

It tends to suit an owner who:

• wants the business to continue independently, under the people who run it now, rather than be absorbed into a group or closed;
• has a capable management team who can run the business without them;
• has a business generating steady, predictable profits with enough headroom to pay the price over a reasonable period;
• does not need most of the price on completion.

It tends not to suit an owner who:

• needs a clean break and the full price in cash on completion;
• has a business whose profits are volatile or dependent on them personally;
• has an offer from a trade buyer at a price the company could never fund out of its own profits;
• wants to keep control, which the independence rules now prevent through the trust.

The honest comparison is between net proceeds, timing and risk. A trade buyer may offer less on paper but pay more of it at completion. An EOT may match a trade price on paper but pay it over five or more years from a business you no longer own. Since November 2025 the tax saving that used to tip the balance has halved, so the case for an EOT now rests more heavily on the non-financial reasons: legacy, continuity and the people.

Before you start

• Get an independent valuation. It underpins the market value requirement and gives you a realistic figure to compare with trade offers. Our guide to how businesses are valued explains the approach and the valuation calculator gives a starting range.
• Model the net proceeds and their timing for an EOT sale and for a trade sale, including the tax on each and when you actually receive the money.
• Check the conditions against your company as it stands: trading status, the proportion of staff who are shareholders, and who would sit on the trustee board.
• Talk to the management team before committing. An EOT depends on them running the business well enough to pay you.
• Take specialist advice. An EOT involves a trust deed, a share purchase, a valuation, a funding structure and a tax claim, each of which has to meet rules that have changed twice since 2024.

If a trade sale is still on the table, our step by step guide to selling and the comparison of share sales and asset sales cover that route.