Employee Ownership Trusts - What are they and how can I benefit from one?

Posted on 22 Jul 2025

Employee Ownership Trusts (EOTs) are becoming an increasingly popular option for business owners looking to plan for succession, reward staff, or secure the long-term future of their company.
                                                                     
But what exactly are they, and how do they work?

What are Employee Ownership Trusts?

Employee Ownership Trusts (EOTs) are a trust mechanism that enable employees to collectively own a company. Introduced by the Finance Act 2014, EOTs were designed to promote employee ownership by offering companies certain tax reliefs and operational advantages.

EOTs fall under the broader category of Employee Benefit Trusts (EBTs), which are trusts established to provide benefits to employees, former employees, and, in some cases, their relatives and dependents.

An EOT is run by trustees (often an incorporated TrustCo) who must ensure it is governed in a way that ensures it operates in the best interests of employees to fulfil its intended purpose. The trustees are responsible for making decisions regarding the class of beneficiaries, the distribution of the trust fund, and any changes to the company’s share capital. While employees do not directly manage the trust, some companies establish employee councils or advisory committees to provide input on governance.

As an EOT requires a controlling interest in a company, the transition can be costly. The financing of the transaction can often be the trickiest part to structure. The purchase of shares by an EOT is typically funded through one or a combination of the following methods:

• Company profits: The company may use accumulated profits over time to fund the purchase.

• External financing: Loans from banks or private lenders can be secured to finance the transaction (albeit caution should be exercised with this approach to ensure any security given does not invalidate the scheme).

• Deferred payments: Previous owners may agree to a structured payment plan, receiving funds from future business earnings.

Where the directors of the company are also the shareholders (which is often the case in smaller, owner-managed businesses) there is a tension between the duty as directors to promote the success of the company, and that of their role as shareholders who will be the beneficiaries of the arrangement. 

Advice should be sought and care should be taken to ensure these risks are adequately addressed.

How can my company benefit from an EOT?

EOTs provide several advantages, particularly in terms of tax reliefs and business continuity. The key benefits are:

• Capital gains tax relief: Business owners selling to an EOT may qualify for 100% capital gains tax relief, making it a cost-efficient succession option.

• Tax-free bonuses: Employees of EOT-owned companies may receive income tax-free bonuses of up to £3,600 per year.

• Inheritance tax reliefs: Transfers to an EOT are not considered chargeable transfers, which means they are not subject to inheritance tax.

• Employee engagement: Employees gain a stake in the company’s success, fostering motivation and long-term commitment.

• Succession planning: EOTs provide a structured transition for ownership, ensuring continuity and stability when business owners retire or exit.

There are various requirements that the EOT must meet to be eligible for the different tax reliefs, including:

• All-employee benefit: The trust must operate for the benefit of all employees, and only employees.

• Equal treatment: Distributions from the trust fund or qualifying bonus payments must be made on equal terms for all eligible employees.

• Controlling interest: The trustees must hold more than 50% in the share capital and voting rights, and must be entitled to more than 50% of profits available for distribution and assets on winding-up.

• Trading requirement: The company subject to the EOT must be either a trading company or the principal company of a trading group.

• HMRC compliance: EOTs must comply with HMRC regulations.

• Trustee citizenship: The trustees must be UK residents at the time of the sale to the EOT.

• Restrictions on former owners: Rules limit the involvement of previous owners in the trust’s governance to ensure genuine employee ownership.

The documentation and process for a sale to an EOT is in many ways similar to a traditional share purchase. Details of this were provided within our last article, ‘What are the main things to consider when buying a business?’

HY Solicitors

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