Selling your business can be both an emotional and financial challenge. For many entrepreneurs, the thought of parting ways with the company they built often comes with the additional stress of navigating complex tax implications. However, there is a growing solution for business owners in the UK looking to exit their businesses tax-efficiently while ensuring long-term sustainability for employees—a sale to an Employee Ownership Trust (EOT).
Here’s everything you need to know about EOTs and how they can benefit business owners like you.
What is an Employee Ownership Trust (EOT)?
An Employee Ownership Trust (EOT) is a government-backed initiative introduced in the UK in 2014. It enables business owners to sell their companies to a trust that holds the business on behalf of its employees. By doing so, owners ensure the continued legacy of the business while also rewarding employees with a stake in its success.
The EOT model is gaining popularity among entrepreneurs for its balanced approach to business succession, offering both company stability and significant tax advantages for the seller.
The Major Tax Benefits of an EOT
1. Sell Your Business Tax-Free
One of the biggest draws of an EOT is the possibility of selling your business tax-free. When a qualifying sale is made to an EOT, business owners can benefit from a 100% exemption from Capital Gains Tax (CGT) on the proceeds of the sale.
For instance, if you’re selling a business worth £5 million to an EOT, the sale proceeds are completely exempt from CGT if all conditions are met. However, the clawback period for this relief has been extended under the Autumn Budget 2024. The company must now maintain compliance with EOT conditions for four years, up from the previous one year. If a disqualifying event occurs during this extended period, the CGT relief can be revoked.
2. Tax-Free Bonuses for Employees
Not only does an EOT ensure a tax-efficient exit for the business owner, but it also provides tax incentives for the employees. Under the EOT structure, employees can receive annual tax-free bonuses of up to £3,600. From 2024, directors are excluded from participating in these bonuses, ensuring the benefit is distributed more equitably among employees
3. Inheritance Tax (IHT) Relief
An EOT may also provide relief from future inheritance tax liabilities. When ownership is transferred to the trust, it removes the company from the estate of the original owner, potentially reducing inheritance tax concerns. However, recent updates have tightened restrictions on certain asset types eligible for IHT relief. These changes, effective in 2026, may particularly affect industries with asset-heavy operations, such as family-owned farms.
How to Qualify for EOT Tax Benefits
While the tax benefits of selling to an EOT are generous, there are specific criteria that must be met to qualify:
The EOT must acquire a controlling interest in the business (more than 50% of shares and voting rights).
The company must be a trading company or the principal company of a trading group.
Trustees must now be UK residents and must ensure the purchase price reflects the fair market value of the shares
The trust must be set up for the benefit of all employees on equal terms, meaning no individual can have a preferential stake.
The seller cannot hold a controlling interest post-sale, and any deferred payment must include commercially reasonable interest rates
Working with tax and legal advisers can ensure your business sale meets these requirements and maximises the available benefits.
Why Consider an EOT?
Legacy Preservation
Selling to an EOT ensures that the business you’ve built continues to operate with its values intact. Employees who have a stake in the company are more likely to maintain the culture and work towards long-term success.
Employee Engagement
The EOT model creates a sense of ownership and alignment among employees, leading to higher engagement, productivity, and retention rates. A motivated workforce is a significant competitive advantage.
Simpler Negotiations
Compared to selling a business to a competitor or private equity firm, EOT negotiations are often smoother, as the terms are generally focused on the fair treatment of all stakeholders rather than just maximising short-term profit.
Government Backing
The tax benefits and support from HMRC reflect the UK government’s commitment to encouraging employee ownership as a viable business succession strategy.
How to Transition to an EOT
Taking the steps to sell your business to an EOT requires careful planning and execution, including the following steps:
Valuation - Conduct an independent valuation to determine the fair market value of your business. This valuation is now mandatory under the updated rules
Trust Set-Up - Work with legal advisers to establish the trust and ensure compliance with EOT requirements.
Financing - Determine how the trust will finance the purchase of the shares. This may include a combination of available company cash reserves, loans from financial institutions, or deferred payments to the seller.
Employee Communication - Inform employees about the transition, explaining how the EOT will benefit both the business and the workforce.
Professional Guidance - Enlist the expertise of an EOT specialist, including legal, financial, and tax advisers, to ensure a seamless transition and to fully capitalise on the available tax benefits.
Is an EOT Right for You?
Selling your business is a deeply personal decision, and the right exit strategy depends on your goals. If you’re looking for a tax-efficient exit that preserves your business’s legacy while benefiting its employees, an EOT can be an excellent option.
However, the increased compliance and governance requirements introduced in the 2024 Budget mean that professional advice is now more important than ever. Consulting with experienced advisers ensures that your exit is not only tax-efficient but also paves the way for the long-term success of your business.
With its significant tax advantages, employee-focused approach, and government backing, an EOT remains a winning solution for both business owners and their teams.
Find Out if Your Business Could Qualify for an EOT
Are you wondering if your business has the potential to benefit from an Employee Ownership Trust? Start exploring how an EOT could provide a tax-free exit while ensuring the long-term stability and success of your company.
Talk to us today and take the first step! Our team of expert advisors can help you assess your business, guide you through the process, and find out if an EOT is the right choice for your exit strategy.
Your future goals—and your business legacy—deserve the best. Don’t leave it to chance.
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