Selling to an Employee Ownership Trust: the tax, the conditions and the catches

An Employee Ownership Trust, or EOT, is a trust that holds a controlling stake in a company for the benefit of all its employees. The owners sell their shares to the trustees, usually for a price paid over several years from the company's profits. The business stays independent and its people share in its success through the trust and, if it chooses, tax-free bonuses.

For disposals to EOT trustees on or after 26 November 2025, 50% of the gain is chargeable on you at the time of sale, at normal capital gains tax rates of 18% within the basic rate band and 24% above it. The other 50% is relieved. That usually still beats a trade sale, but it is no longer tax free.

Before that date, qualifying sales to an EOT gave a full exemption from capital gains tax. For disposals on or after 26 November 2025 the relief is halved, so 50% of the gain is chargeable on the seller. The held-over half is deducted from the trustees' acquisition cost, so it comes into charge if the trustees later dispose of the shares.

For disposals to EOT trustees from 30 October 2024, the trustees must be UK resident and independent of the sellers, former owners and connected persons cannot keep control, trustees must take reasonable steps to ensure the price is no more than market value, and the clawback period runs to the end of the fourth tax year after the sale. The claim must also state sale proceeds and employee numbers.

No. Where relief under section 236H of the Taxation of Chargeable Gains Act 1992 is claimed, the disposal is not a qualifying business disposal for Business Asset Disposal Relief, and Investors' Relief is not available either. You therefore compare EOT relief with a BADR sale, not combine them. We model both for your numbers.

It depends on your gain and rate. With a trade sale and Business Asset Disposal Relief, the first £1m is taxed at 18% and the rest at 24%. With an EOT, only half the gain is taxed, at 18% or 24%. On larger gains the EOT is usually cheaper, but on smaller gains the difference narrows. A trade sale also normally pays cash up front.

The company must be a trading company, or the principal company of a trading group, at the time of the sale and for the rest of that tax year. The trust must hold more than 50% of the ordinary shares, votes, profits and assets on a winding up. The shares must be acquired by trustees who are UK resident, independent and benefit all employees on equal terms.

The trust may be used only for the benefit of all eligible employees on the same terms. Benefits can vary by pay, length of service or hours worked, but not otherwise. The trust can require a qualifying period of up to 12 months before an employee benefits. Trustees cannot lend to beneficiaries or move trust property to another trust, other than an authorised transfer.

It stops the owners and their circle from being too large a share of the workforce that benefits. The test looks at participators, broadly the owners and those connected with them, who are also employees or office-holders. They must not exceed 40% of the total number of employees, in the 12 months after the sale and until the end of that tax year. Small holders under 5% are disregarded.

Yes, since 30 October 2024. Fewer than half of the trustees can be people who were owners or connected to them, and those people cannot hold control over the trust, for example the powers to appoint or remove trustees, direct investments or vary the trust. A professional trustee is common. Founders can stay involved as directors, but cannot control the trust.

The trustees must take all reasonable steps to ensure the price they pay is no more than market value, and any interest on deferred payments must not exceed a reasonable commercial rate. An independent valuation is the usual way to show it. This protects the employees' interest and stops the relief being used to extract value above what the business is worth.

Yes. Relief is withdrawn if, in any of the first four tax years after the year of sale, the trustees stop being UK resident, the company stops trading, the benefit or independence conditions fail, the trust loses its controlling interest or the participator fraction goes above 40%. You must then recalculate your gain as if the claim was never made. The company and trustees need to monitor this.

Normally in instalments from the company's future profits, funded by contributions made to the trustees. Some deals also use bank or vendor financing. The sellers are often paid over five to ten years or more. The payments need to be affordable for the business, because the company's cash flow now supports the price, and a market-value check applies.

The gain is generally charged in the year of sale, based on the full price including deferred amounts. That can create a tax bill before you have received all the cash. For payments over more than 18 months, you may be able to pay the capital gains tax by instalments. We would plan the cash flow of the tax at the start.

Once a company is owned by an EOT, it can pay qualifying bonuses of up to £3,600 per employee per tax year free of income tax, if they are made to all employees on equal terms. National Insurance is still due on the bonuses. Directors can be excluded from the participation rule for the bonus relief, with conditions.

Many sellers stay on for a time as directors or advisers, and are paid for the work as normal. You cannot keep control of the company through the trust. You can usually stay employed and get a salary, although what you do and what you are paid should be reasonable. Your future role should be agreed in the planning stage.

Yes, as long as the trust ends up with a controlling interest, which means more than 50% of the shares, votes, profits and assets. The trust can acquire control in stages, as the rules allow it to reach control by the end of the tax year of the disposal. Any remaining shares are still yours and taxed as normal when sold.

It can be, particularly for profitable, stable businesses with a strong team, and an owner who values legacy and wants a reasonable price over a premium. It is less suitable where the business cannot fund the payments, or you need all your cash on completion. We compare an EOT with a management buy-out and a trade sale on after-tax numbers.