An Employee Ownership Trust is the structure behind most UK employee buyouts since 2014. This guide explains what it is, how the purchase actually works, the tax position, and what running an employee-owned company involves — without assuming you have read a trust deed before.
What an EOT is
An Employee Ownership Trust is a trust that buys and holds a controlling interest in a trading company on behalf of all its employees. The employees do not hold shares personally; the trust holds them collectively, for everyone who works in the business now and everyone who will in future.
The structure was created by the Finance Act 2014, following the Nuttall Review of employee ownership. Parliament's intention was explicit: to give retiring owners a practical, incentivised route for passing businesses to their workforces rather than selling them away. Thousands of UK companies have used it since, from five-person consultancies to household names.
Three parties matter in the structure. The company carries on trading exactly as before, run by its directors. The trust owns the majority of the company's shares. The trustee board — usually a small mix of employee-elected, company-appointed and independent trustees — administers the trust and oversees the company board on the employees' behalf.
How the purchase works
The owner sells their shares to the trust at market value, established by an independent valuation. The trust has no money of its own, so the purchase is funded by the company — and this is the part that surprises people, because it works more simply than it sounds.
On completion, the company contributes what it can sensibly afford from existing cash — sometimes topped up with bank funding — and the trust pays this to the seller. The balance is left outstanding as deferred consideration: a debt owed to the seller, paid down over the following years out of the company's profits. Typical payment periods run from three to seven years, depending on the price and the company's cash generation.
Two consequences follow. First, the seller's money is genuinely at stake in the company's continued success — which is why the leadership and affordability questions matter so much before the deal. Second, the business must be able to fund the purchase and keep investing in itself. A transaction that starves the company to pay the vendor fails everyone, including the vendor.
The tax position
Two reliefs make the EOT route distinctive, and both come with conditions.
For the seller: a qualifying sale of a controlling interest to an EOT attracts a significant capital gains tax relief. For disposals on or after 26 November 2025, half of the gain is exempt and half is chargeable at the main CGT rate of 24% — an effective blended rate of 12%, roughly half the rate on a conventional sale. (Disposals completed before that date qualified for full exemption.) The main conditions are that the company is a trading company, that the trust acquires more than 50% of the shares, that all employees benefit from the trust on the same terms (allowing for factors like hours and length of service), and that the number of continuing shareholders who are directors or employees does not exceed the limits set in the legislation.
For employees: once the company is EOT-controlled, it can pay each employee a bonus of up to £3,600 per tax year free of income tax (National Insurance still applies). The bonus must be paid on the same terms to all eligible employees.
The conditions are not merely entry requirements — most must go on being met. Breaching them later (a disqualifying event) can trigger significant tax consequences, which is why the structure deserves specialist attention both at the transaction and afterwards. HMRC clearance is normally sought before completion, confirming the tax treatment in advance.
Governance: the part that decides whether it works
The legal transaction makes a company employee-owned. Governance makes it a good employee-owned company. The elements are:
- The trust deed — the trust's constitution. It sets out what the trustees may and must do, and how hard it should be to ever sell the company. Drafting this well matters more than almost anything else in the documents.
- The trustee board — the shareholder's conscience. It should meet regularly, understand the business's performance, and hold the company board to account without trying to manage the company.
- The company board — unchanged in function: it runs the business. What changes is who it answers to.
- Employee voice — councils, forums, elected trustees. The forms vary; the requirement is that ownership feels real from the shop floor, not just in the share register.
Life afterwards
For customers and suppliers, nothing changes. For employees, the changes arrive gradually: profit share once the business can afford it, more openness about performance, and — where governance is done properly — a sense that the company's future is genuinely theirs.
For the former owner, the experience depends heavily on planning. The best transitions we have seen share three features: the price was one the business could honestly afford; the leadership succession was real rather than nominal; and the owner's changing role was discussed openly before completion, not negotiated awkwardly after it.
Where advice fits
An EOT transaction touches company law, trust law, tax and corporate finance at once, and the interesting problems sit between the disciplines. Whoever advises you, make sure employee ownership is something they do constantly rather than occasionally — and make sure someone in the room is thinking hard about year five, not just completion day.
This guide is general information, not advice. The tax rules summarised here have detailed conditions and change from time to time; take specific advice before acting. If you would like that advice, start a conversation.