Employee Ownership Trusts (EOTs): What They Are and Why They Matter

What is an EOT? Learn how employee ownership trusts work, tax benefits, how they're funded, and the impact of the 2024 Autumn Budget.

An Employee Ownership Trust (EOT) is a business structure that allows a company to become employee-owned — often through a tax-efficient sale from existing shareholders. With interest in EOTs rising, particularly after changes in the 2024 Autumn Budget, many business owners are now considering this route as an alternative to private equity or trade sales.

Here’s how EOTs work, why they matter, and what they mean for owners, employees, and the business itself.

What Is an Employee Ownership Trust (EOT)?

An EOT is a special form of trust that holds a controlling interest (more than 50%) in a company on behalf of all employees. Instead of shares being held by individuals or external investors, they’re owned collectively via the trust.

The company continues to operate as normal, but the economic benefit and governance influence shift toward the workforce. An EOT is long-term, permanent ownership — not a short-term incentive.

Why Might You Use an EOT?

Many business owners use an EOT to:

  • Secure a tax-efficient exit (with 0% Capital Gains Tax on qualifying sales)

  • Preserve the independence and culture of the business

  • Reward employees and boost retention

  • Avoid the disruption of a trade sale or private equity deal

  • Create a stable succession plan with continuity

EOTs are particularly popular with founder-led businesses, professional services firms, and companies with strong values around staff engagement.

How Is an Employee Ownership Trust Funded?

Typically, the EOT is funded through a combination of:

  1. Bank debt – If the company has borrowing capacity

  2. Deferred consideration – The sellers are paid over time from company profits

  3. Company contributions – Profits transferred to the trust to repay sellers

Employees do not buy shares or invest their own money. The trust acts on their behalf, and the company’s future cash flows are used to finance the deal.

What Are the Advantages of an EOT for the Selling Shareholders?

  • 0% Capital Gains Tax on the sale of shares to the EOT (if qualifying conditions are met)

  • Flexible structure and terms — sellers can agree deferred payments

  • No need for a third-party buyer

  • Ability to protect the brand and legacy

  • Peace of mind knowing the business remains in trusted hands

It’s often seen as a “friendly exit” — less aggressive than other forms of sale.

What Are the Advantages of an EOT for the Employees?

  • Indirect ownership without personal investment

  • Up to £3,600 per year in tax-free bonuses (per employee)

  • Greater say in how the business is run

  • Improved culture and job satisfaction

  • Long-term job security and succession stability

It creates a sense of shared purpose and often leads to higher productivity and staff retention.

Are There Any Disadvantages of an EOT for Selling Shareholders?

  • Sellers may need to wait several years for full payment (if sale is funded from profits)

  • No premium price compared to trade sale or PE exit

  • Less likely to attract outside capital post-sale

  • Must give up control — the EOT must hold a majority interest

That said, many see the trade-off as worthwhile given the tax relief and softer exit process.

Are There Any Disadvantages for the Employees?

  • Employees don’t receive individual shares, so there’s no personal capital gain

  • Influence is often indirect, via employee representatives on the board or trust

  • There's a reliance on good trustee governance to protect their interests

  • Bonuses are subject to profit availability — they’re not guaranteed

Still, the EOT model tends to be well received and culturally strong.

Are There Any Advantages for the Company Itself?

Yes. Companies owned by EOTs often benefit from:

  • Improved staff morale and engagement

  • Greater retention and loyalty

  • Strong reputation and ethical brand positioning

  • Long-term thinking over short-term shareholder pressure

  • A clear succession path without external takeover

EOTs create alignment between business purpose and employee contribution.

What Tax Reliefs Are Available for Employee-Owned Businesses?

There are two main tax advantages:

  1. 0% Capital Gains Tax on the sale to an EOT if:

    • The trust holds over 50% of shares and voting rights

    • The company is a trading company

    • At least all eligible employees benefit equally

  2. Income Tax-free bonuses for employees up to £3,600 per year, provided the bonus is paid in a fair, inclusive way (though still subject to NICs).

These reliefs are key drivers of EOT adoption.

What Needs to Be Considered as Part of the Sale Process?

  • Valuation of the business

  • Financing structure and deferred payment terms

  • Drafting of the EOT trust deed and sale agreement

  • Ongoing governance, including trustee roles

  • HMRC clearance application for tax relief

  • Employee communication and engagement planning

Getting experienced legal and tax advisors involved early is essential.

Can You Use Employee Share Option Schemes Within an EOT?

Yes — it’s possible to run EMI schemes or growth shares alongside an EOT structure, particularly for senior staff or future hires.

However, HMRC rules require that the EOT owns a controlling interest, so any equity incentives must be designed carefully to avoid breaching this requirement.

Who Will Act as the Trustees of, and Manage, the EOT?

The trust must have trustees who act in the best interests of all employees. These can include:

  • Independent professionals

  • Employees

  • Directors (as long as they act impartially)

Many EOTs use a corporate trustee structure with a board of representatives. This board is responsible for monitoring company governance, ensuring fairness, and overseeing major decisions.

What’s the Difference Between an ESOP and EOT?

  • An EOT holds shares collectively for all employees. No one owns individual shares.

  • An ESOP (Employee Share Ownership Plan) typically grants actual shares or options to individual employees.

EOTs focus on indirect collective ownership, while ESOPs are about direct individual ownership. The UK tax reliefs around CGT and bonuses apply specifically to EOTs.

How Did the 2024 Autumn Budget Impact EOTs?

The Autumn Budget 2024 introduced new governance rules and conditions:

  • Trusts must now include at least one independent trustee

  • Employees cannot form a majority of trustees

  • Tighter reporting and transparency standards introduced

  • Clarified restrictions on additional share classes within EOTs

These changes aim to prevent abuse of the EOT model and ensure that the structure truly benefits employees, not just former owners.

Final Thoughts

Employee Ownership Trusts offer a compelling route for business succession, combining generous tax reliefs with a way to preserve your company’s ethos and reward your team.

But EOTs aren’t right for every business. They require careful structuring, long-term thinking, and a strong governance model. For many companies, though, the EOT route is an ideal mix of values, legacy and reward.