Employee Ownership Trust

Selling to an Employee Ownership Trust: still an attractive exit, but no longer tax-free

The Employee Ownership Trust has become one of the more popular ways to hand on a private company, and for good reason, but the tax treatment has moved twice in quick succession and a good deal of the guidance still in circulation is now out of date. The essential idea is unchanged. An owner sells a controlling interest in their trading company to a trust established for the benefit of all the employees, the trust pays for the shares over time out of the company’s future profits, and the business continues under its existing management, with its own people rather than a competitor or a private equity house as the ultimate owner. For the right company it answers the succession question and preserves the culture in a way an outright sale rarely does.

Until recently the tax attraction was blunt and powerful: a qualifying disposal to an EOT was entirely free of capital gains tax, with no upper limit on the amount relieved. That is no longer the case. For disposals made on or after 26 November 2025, only half of the gain is relieved, and the other half is chargeable to capital gains tax in the ordinary way, with no business asset disposal relief available on the taxable portion. At the current main rate that produces an effective charge of around 12% across the whole gain. Set against a straightforward sale, where business asset disposal relief now shelters only the first £1 million at 18% and the balance is taxed at 24%, an EOT can still be the more efficient route for a substantial disposal, and it keeps its commercial and cultural appeal, but it is no longer the tax-free exit it was and the numbers now have to be run with care.

The conditions have also been tightened, and they repay attention because failing them can be expensive. The company must be a trading company or the holding company of a trading group. The trust must acquire and hold more than half of the company, having not controlled it before, and the benefit must be available to all employees on broadly the same terms. Following the reforms that took effect from 30 October 2024, the trustees must be resident in the United Kingdom at the time of the disposal, the former owners and those connected with them can no longer retain control of the trust, and the trustees must take reasonable steps to satisfy themselves that they are not paying more than market value, which in practice means an independent valuation. Most significantly for the seller, the period during which the relief can be withdrawn if the conditions are later breached now runs to the end of the fourth tax year following the year of sale, a far longer tail of risk than the old regime carried, and one that makes the drafting of the trust, and the protections the seller obtains from the trustees, more important than ever.

None of this diminishes the case for employee ownership where it genuinely fits. It does mean that the decision should be taken with clear eyes, modelled honestly against the alternatives, and structured so that the relief claimed at the outset is not lost to a stumble three years later. Advance clearance and a properly documented valuation remain sensible in almost every case. If you are advising an owner who is thinking about succession, or you are that owner, we would be glad to talk it through before the shape of the deal is fixed.

The shareholders of a Company wishing to exit the business but wishing to ensure the continued independence of the company they may consider establishing an Employee Ownership Trust (“EOT”)

The benefit to the shareholder is that subject to satisfying the requisite criteria he can sell his shares to the EOT and claim complete exemption from Capital Gains Tax.

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