Why Employee Ownership Trusts are an increasingly popular choice for founder-led businesses

The Employee Ownership Trust (EOT) model has grown by an enormous 1,640% in total business count in the decade since the Finance Act 2014 introduced the structure, with 560 transitions to EOTs in 2024 alone.

There are currently around 2,470 employee-owned businesses, collectively employing some 358,000 people, according to UK EO Business Register data compiled by the Employee Ownership Association and the White Rose Employee Ownership Centre. Recent increases to the Capital Gains Tax (CGT) rate are likely to mean that the sale of businesses to an EOT becomes an even more popular option for shareholders looking at exit strategies.

The benefits of employee ownership mean that the EOT model has been chosen by a wide range of high-profile businesses in the UK, from creative industry businesses to large high street retailers – most recently, the Entertainer, the largest toy retailer in the UK, the shareholders of which have announced their intention to transition to an EOT before the end of the year.

What does this mean in practice and how can businesses know if this is the best structure for them going forward?

What are the benefits of EOTs?

An EOT is a structure that gives the majority ownership of a business to staff, yielding multiple financial and cultural benefits.

Tax advantages

• No CGT for the shareholders on the sale of shares to an EOT.
• Bonuses up to £3,600 per employee are exempt from income tax.
• No Inheritance Tax liability for selling shareholders.

Improved employee engagement

• Boosts staff incentivisation and retain company culture.
• Employees effectively co-own the company, leading to increased investment in its success.

Preservation of company values

• Founders can retain a minority interest and directorships to ensure the brand, culture and values are preserved.
• Continuity is maintained as no third-party buyer disrupts operations.

The Autumn Budget 2024 introduced a number of changes to ensure EOTs remained focused on encouraging employee ownership and to prevent opportunities for abuse. These included rules around UK residency for trustees and restricting former owners from retaining control of the company by controlling the EOT itself. The period during which the company must meet qualifying conditions for CGT relief has been extended (from one tax year to four), while other changes relate to valuation requirements and tax relief for distributions to EOTs.

But, as well as the tax advantages, there are many reasons to sell to an EOT. Shareholders can retain shares in the business (as long as this is less than 50%) and/or stay on as directors to ensure the business's ethos and culture remains. Not all shareholders need to sell, nor do they need to sell pro-rata. It’s also generally a much lighter sales process.

Osborne Clarke comment

For an efficient exit that preserves what makes a business special, an EOT may be the right choice. An EOT can provide a tax-beneficial way for shareholders to realise value, but a common pitfall for founders is underestimating the careful planning and due diligence required when transitioning or negotiating an onward sale.

As with any transaction, businesses need to be aware of the risks and to ensure the model is the right choice. Given the unique nature of the EOT structure and the rules relating to how and when onward sales can occur, when businesses are planning this type of sale – even when some distance in the future – it is important that they seek professional advice to navigate tax consequences, structuring issues and trustee considerations.

Our specialist team advises businesses across the EOT lifecycle. Osborne Clarke has assisted over 40 companies with their EOTs, advising on the transition and onward sales, on the complexities and potential risks of selling to an EOT, and on the benefits it can bring for a company and its employees. Reach out to our experts to have a conversation about how our multidisciplinary team can help.

Our next webinar "Employee Ownership Trusts: Tax‑Smart Exits, Culture Gains — Are They Right for Your Business?" will take place on Tuesday 21 October at 10:00.

Join us for an hour's interactive webinar where our team will share their experiences in assisting a large number of companies become EOT-owned as well as the sale of EOT-controlled companies. This session will be of interest to business owners looking to transition their company to an EOT structure as well as investors and companies interested in acquiring EOT-controlled businesses.

Register now >