We explain how an employee ownership model works in plain terms and what it means for your family and your firm.
Introduced in the Finance Act 2014, an employee ownership trust (often called an eot) lets a trust hold shares for the benefit of staff. The main appeal is a set of generous tax breaks. Sellers can qualify for 0% Capital Gains Tax on a proper disposal. Staff may receive income tax‑free bonuses up to £3,600 a year.
Rules tightened from 30 October 2024 and further changes are on the horizon. We cover how the definition of acquisition costs has changed and why trustees and trustees’ decisions matter. We also explain why many advisers seek Capital Gains Tax guidance or clearance to reduce risk.
Our aim is practical. We will map the journey from deciding if an eot fits your companies and business, to funding the sale and staying compliant so reliefs are preserved.
Key Takeaways
- An EOT is a long‑term model where a trust holds shares for staff benefit, not a quick tax trick.
- Headline reliefs include possible 0% CGT for qualifying disposals and income tax‑free bonuses up to £3,600.
- Rules changed from 30 October 2024; acquisition costs and funding routes now need close attention.
- Trustees must act in staff interests, and good records help protect reliefs.
- Practical clearance or guidance from the tax authority often reduces uncertainty.
Employee ownership trusts explained for UK companies
We explain how this model works in simple terms and why some founders pick it for succession.
What this arrangement is and how it differs from an employee benefit vehicle
An employee ownership trust is a specific type of employee benefit arrangement. It is set up to hold a controlling stake so the whole workforce benefits.
The key difference is the focus on a lasting controlling interest. An employee benefit vehicle can hold shares but often serves other aims, like incentives for a few managers.
Indirect staff holding and what “held on behalf of employees” means
Staff do not each buy a share. Instead, the trust holds the shares and trustees act for the group.
In practice this can mean profit-sharing, annual bonuses and stronger engagement. Trustees make decisions in the interests of all qualifying staff.
When an EOT suits succession rather than a trade sale or MBO
This route often fits owners who value continuity and culture. It can avoid the disruption of a trade sale or private equity deal.
Compared with an MBO, the seller may accept different timing or price certainty. Not all shareholders must sell, but many sell a majority at once to secure tax relief.
For more technical guidance see our employee ownership trust guidance and further notes on succession planning and shareholder protection.
How an EOT sale works from valuation to consideration
From independent valuation to deferred payouts, an EOT sale has defined mechanics.
We set out the typical steps so you can see who acts when money moves and where scrutiny usually sits.
Transferring a controlling interest
The owners sell more than 50% of the current capital to the EOT. That level must give the group real control across votes, profits and winding‑up rights.
Valuation and duty of care
Sales are usually at market value and backed by an independent valuation. Trustees must avoid overpaying.
“Trustees must balance fair price with protecting the company’s long‑term health.”
Deferred consideration and funding
Consideration is often partly deferred as a debt owed by the EOT. The company uses future profits and regular contributions to repay sellers.
| Step | Who | Typical funding | Key risk |
|---|
| Valuation | Independent valuer | Paid by company | Overvaluation |
| Acquisition | Trustee & seller | Third‑party debt | Repayment burden |
| Repayment | Trustee/company | Profits & contributions | Cashflow strain |
Since 30 October 2024, acquisition costs expressly include borrowed repayments, valuation fees, interest and stamp duty when directly linked to the purchase. Costs of owning the shares after the disposal are excluded.
employee ownership trust hmrc qualifying conditions and compliance
Before you commit, check the qualifying tests that protect 0% CGT relief and keep the plan working year after year.
Trading company requirement: the target must be a trading company or the principal company of a trading group. Mixed activities, large idle cash or property investments can prompt closer review.
The controlling interest test
Control is assessed across votes, ordinary share capital, profits available for distribution and winding‑up rights. The EOT must not control before the tax year of transfer and must hold control at the tax year’s end.
All‑staff benefit and permitted variations
All qualifying staff must benefit on the same terms. Small, allowed differences can reflect salary, length of service or hours worked.
Trustee residence, participator limits and retained control
Trustees must be UK tax resident. The government now watches residency closely to prevent avoidance.
Continuing shareholders and connected persons must not exceed 40% of staff by participator tests. Former owners may remain directors but must not control via the eot trustee board.
| Requirement | Why it matters | What to record |
|---|
| Trading status | Ensures commercial activity | Accounts, activity schedules |
| Control tests | Determines qualifying disposal | Share register, voting records |
| Trustee residence & limits | Prevents tax avoidance | Trustee residence proofs, participator checks |
Keep annual checks: minutes, valuations, beneficiary lists and bonus calculations. Compliance is not set‑and‑forget.
HMRC tax reliefs available through an Employee Ownership Trust
Understanding the specific tax breaks helps you weigh selling to an EOT against other exit options.
Capital gains tax (CGT) relief can mean a 0% rate on a qualifying disposal of shares to an EOT. That relief only applies if the transaction and continuing conditions meet the statutory tests. The rules must stay satisfied after completion, not just at signing.
How EOT CGT relief compares with BADR changes
By contrast, Business Asset Disposal Relief (BADR) gives a reduced CGT rate on qualifying gains. From 6 April 2025 BADR rates rise to 14% and then to 18% from 6 April 2026.
| Relief | Rate | When useful | Key limit |
|---|
| EOT disposal | 0% CGT | Sale of controlling stake to an EOT meeting tests | Must meet ongoing qualifying conditions |
| BADR | 14% (2025), 18% (2026) | Individual disposals of business assets | Lifetime limit and changing rates |
| Practical outcome | Varies | Compare net proceeds after tax and commercial terms | Use independent valuation and advice |
Bonuses, NICs and who must be included
Staff can receive income tax-free bonuses up to £3,600 a year if payments meet the “same terms” rule for eligible workers. National Insurance contributions still apply on these payments.
All qualifying staff must be offered the scheme on the same basis. Common pitfalls arise in small subsidiaries where directors or office holders are the only paid person. Those office holder complications can exclude or include people unintentionally. Keep records and consistent criteria such as pay bands, hours worked or service length.
Inheritance tax and written clearance
The transfer to an EOT is typically neutral for inheritance tax and is outside the relevant property regime. That said, careful implementation matters for family estate planning.
We recommend seeking written clearance or formal engagement with tax authorities where funding, deferred payments or unusual group structures are involved. Clearance reduces uncertainty and helps trustees evidence robust governance.
Conclusion
A well-planned transfer protects what you built — but it needs solid checks on control, price and cashflow.
In practice, an eot can deliver 0% tax and tax-free staff bonuses. This only holds if a genuine controlling interest is sold at market value and the ongoing conditions are met.
Good governance matters. UK-based trustees and clear trustee duties reduce risk. Record decisions each year and watch the four‑year window that can trigger a clawback.
Plan funding and staged consideration to survive a slow year. Treat written clearance and professional advice as risk management, not red tape.
If you want to explore this alongside a trade sale or MBO, start with valuation, headcount for participator tests, trustee structure and a funding plan.
FAQ
What is an Employee Ownership Trust and how does it differ from an Employee Benefit Trust?
An Employee Ownership Trust (EOT) is a vehicle set up to hold company shares for the benefit of staff as a broad group. It differs from an Employee Benefit Trust since an EOT must meet specific all‑staff benefit rules and qualifying conditions to secure tax reliefs. An EOT focuses on long‑term, collective benefit rather than selective share incentives for a few.
What does “held on behalf of employees” mean in practice?
It means trustees must act for the workforce as a whole, not individual former owners or outside investors. Trustees have fiduciary duties to manage shares and distribute benefits in line with the trust’s purpose. In practice this requires clear policies, records of decisions and evidence that benefits reach the entire staff on broadly similar terms.
When is an EOT used for succession planning instead of a trade sale or management buy‑out?
An EOT suits owners who want to preserve company culture, protect jobs and leave a legacy for staff. It avoids typical trade sale outcomes where new owners may change direction. For those wanting to maximise short‑term value, private equity or a trade sale may be better. An EOT is often chosen when continuity and staff welfare are priorities.
How does an EOT sale work from valuation to consideration?
The process starts with an independent valuation to set market value. Trustees then agree terms with vendors and arrange consideration — often a mix of cash and deferred sums. Documentation, warranties and trustee approvals follow. The trustees must show fair processes and that the price reflects independence and market value.
Why must a controlling interest be transferred and why is “more than 50%” important?
To qualify for CGT relief the trust must acquire a controlling interest in relevant voting rights, share capital, profits and winding‑up proceeds. More than 50% ensures the trust can influence company policy and protect staff interests rather than remaining a minority holder with limited power.
How is market value set and what is the trustee’s duty regarding independent valuations?
Market value is usually set by an independent valuer experienced in private company sales. Trustees must satisfy themselves that the valuation is reasonable and defensible because they are accountable to beneficiaries. Clear valuation reports help demonstrate trustees acted prudently.
How is deferred consideration commonly funded?
Deferred sums are often paid from future company profits, structured earn‑outs or retained cashflow. In some cases the company itself pays over time. Trustees and vendors should document the payment mechanism and test its realism against projected trading performance.
What acquisition costs can be recovered and what changed from 30 October 2024?
Reasonable acquisition expenses — legal, advisory and financing costs — can be met from company resources in typical transactions. From 30 October 2024 HMRC clarified aspects of allowable costs and documentation standards, so trustees should retain invoices and approvals to support claims.
Can third‑party debt finance be used, and what about interest and stamp duty?
Yes. External lending can fund part of the purchase. Interest costs and stamp duty are ordinary commercial items; trustees should ensure borrowing terms are prudent and that payment obligations won’t jeopardise long‑term employee benefits.
What qualifying conditions must the company meet for the EOT to be valid?
The company generally needs to be a trading company or the principal trading company of a trading group. It must meet the controlling interest tests and operate for trading purposes rather than as an investment vehicle. Trustees must also ensure compliance with the all‑staff benefit rules.
How does the controlling interest test work across votes, share capital, profits and winding‑up rights?
The trust must hold a majority in four key areas: voting rights, ordinary share capital, rights to profits and rights on a winding‑up. This test prevents sellers or connected parties from retaining effective control. Careful structuring of share classes and rights is essential.
What does the “all‑employee benefit” requirement mean and what are “same terms” rules?
Benefits must be available to the workforce as a whole on broadly similar terms. “Same terms” means avoiding unjustified differentiation. Reasonable distinctions are permitted for pay, service length or hours worked, but not to exclude large groups of staff or favour former owners.
How may benefits be varied by remuneration, length of service and hours worked?
Trustees can design schemes with graduated scales so long as variations are objectively justifiable and documented. For example, larger bonuses for longer service or full‑time staff are acceptable, provided the scheme remains broadly inclusive and nondiscriminatory.
Why does trustee UK tax residence matter and why has HMRC focused on it?
Trustee residence affects tax treatment and access to reliefs. HMRC has tightened scrutiny to ensure non‑UK structures are not used to sidestep UK tax rules. Trustees should be clear about their residence status and keep records to show compliance.
What are participator limits and the 40% test for continuing shareholders and connected persons?
Limits exist to stop significant sellers or connected persons from benefiting unduly after a sale to a trust. If the continuing interest of such persons exceeds 40% in certain contexts, it can jeopardise reliefs. Sellers must manage retained interests carefully to meet thresholds.
How are former owners and connected persons prevented from retaining control via the trustee board?
Trust deeds and governance arrangements should limit voting or veto rights for former owners. Independent trustees, clear conflicts‑of‑interest policies and restricted trustee roles help show retained control has not been preserved through back‑door arrangements.
What are disqualifying events and the four‑year clawback risk for CGT relief?
Disqualifying events include breaches of qualifying conditions. If such events occur within four years after the disposal, HMRC can withdraw CGT relief and seek clawback. Good governance and ongoing compliance monitoring reduce the risk.
What practical record‑keeping is needed to evidence compliance year on year?
Keep trustee minutes, valuation reports, benefit policy documents, payroll records for bonus schemes and evidence of trustee decisions. Regular audits or trustee reports help demonstrate continuing compliance and reassure staff and advisers.
How does CGT relief work for a qualifying disposal to an EOT?
Where conditions are met, vendors can obtain 0% CGT on the sale of shares to the trust on a qualifying disposal. Sellers should document the transaction and secure independent valuations to support the zero‑rate claim.
How does EOT CGT relief compare with Business Asset Disposal Relief changes from April 2025 and April 2026?
EOT relief provides full CGT exemption for qualifying sales to a trust. Changes to Business Asset Disposal Relief have reduced its advantages over 2025–26, making EOTs relatively more attractive for owners seeking tax‑efficient exit routes that preserve the business for staff.
What about income tax‑free bonuses up to £3,600 and National Insurance contributions?
Qualifying companies may pay income tax‑free bonuses of up to £3,600 per beneficiary each tax year. Employers should check NIC treatment and ensure all eligible staff are included on the same basis to avoid compliance issues.
Who must be included in bonus schemes and what are common “office holder” complications in groups?
All staff who work for the company or group on broadly similar terms should be eligible. Office holders, directors or contractors can create complications; trustees should seek tailored advice to ensure these roles do not exclude individuals improperly or breach the all‑staff rule.
How is an EOT treated for Inheritance Tax and the relevant property regime?
Properly structured trusts used for trading businesses are generally outside the relevant property regime, which reduces certain IHT charges. Trustees should obtain specialist advice to confirm the company and trust structure maintain the intended IHT position.
Why is HMRC clearance recommended before completing an EOT transaction?
A clearance or informal agreement from HMRC reduces uncertainty over tax treatment, particularly CGT relief and benefit positions. Early engagement helps surface issues and provides greater confidence for sellers, trustees and staff.
