Employee ownership is growing fast and outperforming.
As the chart shows, since the introduction of Employee Ownership Trust legislation in 2014, the Employee-Owned sector has enjoyed significant growth with over 2,500 businesses now being majority employee-owned.
Research from the White Rose Employee Ownership Centre shows that businesses typically:
• Increase their investment in skills and promote wellbeing for staff
• Have employees which report greater motivation as co-owners
• Have a lower risk of business failure than non-EO businesses
Do you qualify for EOT Relief?
EOT Relief is a relief that applies to UK tax resident individuals (but not to corporate entities) and reduces the rate of CGT payable on the sale of shares in a UK trading company (or the holding company of a trading group) to an EOT from the standard rate of CGT of 24% to 12% (only 50% of the gain made on the sale shares being subject to CGT)
EOT Relief is uncapped (unlike Business Asset Disposal Relief (“BADR”) which has a cap on the relief of £1.0 million with CGT at 18%)
We summarise the conditions for obtaining EOT Relief below:
The shareholdings sold to the EOT must be held by private individuals who are UK resident for tax purposes, and the acquiring Trust must also be resident in the UK for tax purposes.
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The shareholdings must be in a UK limited company, which is a trading company (not an investment company), or which is the holding company of a trading group
The acquiring entity must be an all-employee benefit EOT and the trustees must be (i) independent of the selling shareholders (those shareholders who hold 5.0% or more of any class of equity shares) and connected persons and (ii) be UK resident
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The EOT must acquire at least 50.1% of the target company (i.e. have control)
The acquiring Trust (EOT) must have taken reasonable steps to ensure that the sale price does not exceed market value (e.g. had an independent valuation carried out)
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The Participator Fraction must not have exceeded 40% in the twelve months prior to the transaction. The Participator Fraction is the ratio of persons who are employees / office holders who hold 5.0% or more of any class of equity shares in the Company (together with persons connected to them who are also employees /office holders) compared to the total number of employees (excluding office holders who are not employees)
The transaction should have been cleared by HMRC through the Transaction In Securities (“TIS”) clearance procedures
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The EOT Relief conditions above must continue to be satisfied for the period up to the end of the fourth tax year following the tax year in which the EOT transaction was completed. Failure to continue to satisfy the conditions would lead to EOT Relief being withdrawn, and the standard rate of CGT applying to the sale of shares (currently 24% or 18% if BADR applies).
The conditions for EOT Relief should continue to be met after the end of the fourth tax year following the tax year in which the EOT transaction was completed otherwise a tax charge may crystallise in the EOT itself. The EOT’s potential CGT charge being based on a deemed disposal of its interest in the company at the then market value less the EOT’s tax base cost as inherited from the selling shareholders which has the potential to reduce the funding available to pay any outstanding deferred consideration.
Why selling to an EOT is attractive.
For the owners:
• Controlled exit
• Addresses ownership succession
• Legacy
• Realise price based on independent fair market valuation
• Tax efficient
For the company:
• Continued independence
• Values of business maintained
• Good for clients
• Sustainable ownership structure
• Ability to recruit and retain staff
• Increased productivity and engagement
For the employees:
• Ability to share in profits but not required to provide funding to purchase shares
• More control of the future of the business
• Ownership succession is addressed
Founders who handed their businesses on.
What it means for you as business owner.
The EOT structure offers business owners total flexibility in their ongoing role.
Some of our clients have retired immediately.
Whilst you are no longer the controlling shareholder, you can remain as a director of the company and oversee the succession plan. The payment of deferred consideration which extends over typically 5-8 years means that you have a very keen interest in ensuring that the business continues to thrive. Often owners use this period to hand over executive responsibility to their successors, or if no successors are in place, to recruit or train their successors.
Many of our clients choose to stay with their business as an employee – perhaps handing management to their successors but keeping key clients or key supplier relationships. This flexibility that an EOT offers is unmatched in this regard.
Longer term, many owners will move into Chair-person type roles. Their years of experience provide a steady hand on the tiller and guide strategic direction whilst the next generation steps up to provide executive leadership and management.
12%
What the numbers look like under the 2025 Budget.
On the 26th November 2025, the Government’s Budget introduced a reduced rate of relief for qualifying EOT disposals (sales). Previously 100% of the gain made by shareholders was exempt from Capital Gains Tax (“CGT”). Now only 50% of the gain is exempt. With CGT for gains made on the sale of shares being charged at 24%, this means an effective rate of 12%.
A claim for “EOT Relief” cannot be used in conjunction with Business Asset Disposal Relief (“BADR”) and does not affect an individual’s £1m lifetime allowance for BADR.
All taxpayers have a £3,000 annual allowance for CGT. A CGT liability must be settled by 31 January following the end of the tax year in which the gain occurred via Self-Assessment reporting. In certain circumstances a s.280 TCGA application can be made to arrange a staged payment plan with HMRC.
If you want to see what
this looks like for your
team.
Most business owners will be only too aware of the team around them that helped bring their business to life and drove its growth. A well structured EOT sale can help reward those individuals as their continued employment is normally a key part of delivering the future success of the business.
If you are interested in speaking with us about how a sale of your company to an EOT might work for you, for your team and for the long-term success of the business, please get in touch.
Paul Harris, Founder of VIBE Teacher Recruitment.
"I didn’t feel comfortable with the idea that we might be leaving these people we cared about, and the company we cared about, in the hands of people we didn’t know."
“All founders are constantly thinking about an exit strategy. But for me the key consideration as to why we went the EOT way was that we cared about the company. We wanted to preserve the team, the culture, the brand, the reputation, the service delivery, and the happiness.
The biggest concern I had with selling any other way was that the team no longer would have control over how the company was run. I wrote in a letter to our team: the legacy of heroes is the memory of a great name and the inheritance of a great example. Choosing this direction is about setting an example for my kids and my family, and for the people who built this company with me.”
Why Employee Ownership - common questions.
Selling to an EOT has a number of major advantages for the business and staff. Key advantages include the culture of the business being maintained, long term succession planning being possible and management and staff being clearly incentivised (including tax free bonuses of currently up to £3,600 per person per year). All this should help the business retain and recruit good staff, improve employee engagement which together can improve productivity and generate business out-performance.
No. Employee-owned businesses in the UK consistently outperform their privately-held peers on productivity, profitability and employee engagement, according to EOA research. Many companies that have become EOT-owned out-perform their businesses plan post-completion, with vendor loans paid down earlier than the 5-8 year typical average.
The Company continues to be managed by a board which makes executive decisions and which continues to have a focus on the profitable development of the business. The company is not run by a “workers collective”.
No, this is not the case. The trust (the EOT) holds the shares, and the trustees administer the trust, but the Company continues to be run by its existing directors / senior management team, unless the founder wishes to retire and to appoint a replacement.
Most founders / controlling shareholders stay on as director (and often as chair or CEO) for between 1-5 years post-completion, then transition to a part-time non-executive or consultancy role. You agree your role and time commitment with the trustee board; there is no requirement to exit operationally. Many founders find the post-EOT phase the most rewarding part of their career, with a clear financial exit having been arranged and a plan for management succession in place.
A Company which is owned by an EOT can be sold at a later date, although there are significant tax penalties (“clawback”) if an onward sale occurs within 4-5 years of the original EOT transaction. The trustees also have a fiduciary duty to the employees, such that any sale by the EOT must demonstratively be in the interests of the employees as a whole. In practice, this means a corporate sale by the EOT becomes a decision taken ultimately by the trustees who would take professional advice before arriving at a conclusion.
If a sale does occur, the EOT would apply the sale proceeds first to pay its own capital gains tax, then to pay any balance due on the vendor loan, and then to distribute the balance amongst the employees on an equitable basis.
Employees do not directly own shares in an EOT-owned company. The trust holds the shares on behalf of all qualifying employees as beneficiaries (similar to the John Lewis Partnership model). When an employee leaves the Company or retires he/she ceases to be a beneficiary of the EOT, and when a new employee joins the Company he/she automatically becomes a beneficiary of the EOT after a minimum period of service. Employees benefit from a “dividend” through annual profit share bonuses (the first £3,600 of which is income tax free per employee, per year), and also through having a voice in trustee board appointments. If the EOT ever sold the Company (which is a rare event) then the employees would also benefit from a distribution by the EOT of the sale proceeds, on an equitable basis.
In practical day-to-day terms, very little changes immediately. Employees terms of employment with the Company do not alter but they may become entitled to profit share bonuses (up to £3,600 per year tax-free) under EOT ownership.
Employees do not own the Company directly as the EOT is a trust which holds the shares in the Company, typically 100% ownership, on behalf of employees as beneficiaries (similar to the John Lewis Partnership model). When an employee leaves the Company or retires he/she ceases to be a beneficiary of the EOT, and when a new employee joins the Company he/she automatically becomes a beneficiary of the EOT after a minimum period of service.
Employees benefit from a “dividend” through annual profit share bonuses (the first £3,600 of which is income tax free per employee, per year), and also through having a voice in trustee board appointments.
If the EOT ever sold the Company (which is a rare event) then the employees would also benefit from a distribution by the EOT of the sale proceeds, on an equitable basis.
The trust (the EOT) holds the shares, and the trustees administer the trust, but the Company continues to be run by its existing directors / senior management team, unless the founder wishes to retire and to appoint a replacement.
Most founders / controlling shareholders stay on as director (and often as chair or CEO) for between 1-5 years post-completion, then transition to a part-time non-executive or consultancy role. You agree your role and time commitment with the trustee board; there is no requirement to exit operationally. Many founders find the post-EOT phase the most rewarding part of their career, with a clear financial exit having been arranged and a plan for management succession in place
It is true that the trustees can appoint and remove directors of the Company, such that they ultimately have control over the Company, but it would be unlikely to exercise this power to overhaul the board of directors, unless the board had become dysfunctional.
We are happy to talk over Teams or meet to discuss your exit planning.
We can normally assess whether an EOT transaction will be viable and the likely valuation range at our first meeting.
For accountants, lawyers, and wealth managers
Are you working with a client who should be considering a sale of their business to an EOT? We will complement the work you do to deliver an optimal outcome for your client.