Employee Ownership Trusts (EOTs) Explained 2026/27 | Tax, Exit Planning & Rules | CoreAcc

An Employee Ownership Trust (EOT) is a specific type of trust that acquires a controlling interest in a trading company and holds those shares collectively for the benefit of all the company's employees. Since their introduction in 2014, EOTs have grown rapidly in popularity as a succession planning and exit route for owner-managed businesses — particularly those where the founder values continuity of culture, independence, and employee welfare over maximising the short-term sale price.

The tax relief available to business owners selling to an EOT was significantly changed at the Autumn Budget on 26 November 2025. The previous 100% Capital Gains Tax exemption has been replaced by a 50% exemption — increasing the effective CGT rate on a qualifying EOT sale from 0% to 12%. While this represents a meaningful increase in the tax cost compared to the pre-Budget position, the EOT route remains one of the most tax-efficient exit options available to UK business owners, particularly when compared with the 18–24% CGT rates now applying to most other business disposals.

Further changes to the EOT ownership conditions were introduced at the Autumn Budget 2024 (from 30 October 2024), tightening the anti-avoidance rules and introducing trustee residency requirements. Understanding both sets of changes is essential for any business owner considering an EOT in 2026 or 2027.

At CoreAcc Accountants, we advise owner-managed businesses on exit planning, succession, and business tax strategy across Hertfordshire and North London. This guide explains how EOTs work, who qualifies, what the relief costs after the November 2025 changes, and when an EOT is — and is not — the right choice.

Disclaimer: This article is for general information only and does not constitute tax, legal, or financial advice. EOT transactions are complex — always seek specialist advice tailored to your individual circumstances before proceeding.

1. What Is an Employee Ownership Trust?

An EOT is a form of indirect employee ownership. Employees do not each receive shares in the company — instead, the trust holds a controlling stake on their collective behalf, and a board of trustees (typically including employee representatives) manages the trust's affairs in the employees' interests. The model was inspired by the John Lewis Partnership and draws on the principle that a business run for the benefit of its workforce tends to be more engaged, more productive, and more resilient.

In a typical EOT transaction:

1. A qualifying EOT is established — usually as a private company limited by guarantee, with employees of the company represented on the trustee board
2. The existing shareholders sell more than 50% of the ordinary share capital to the EOT at market value, as determined by an independent valuation
3. Part of the purchase price is typically paid upfront (using the company's existing cash reserves or third-party finance), with the remainder left as a deferred debt owed by the EOT to the selling shareholders
4. The trading company uses its future profits to make contributions to the EOT, which uses those funds to repay the deferred consideration over time — typically three to ten years
5. Once the debt is repaid, the EOT continues to hold the shares on behalf of employees indefinitely

The business continues to operate as normal throughout. The existing management team stays in place. There is no disruption of the kind associated with a trade sale or private equity transaction. The seller exits — or steps back gradually — and the employees become the collective beneficiaries of the company's ongoing performance.

2. The Tax Benefits: What Has Changed and What Remains

For the selling shareholders

Before 26 November 2025: Business owners selling a qualifying controlling stake to an EOT received a 100% CGT exemption on the gain — a 0% effective rate, with no upper cap on the value of shares sold.

From 26 November 2025: The relief has been reduced to 50% of the gain. The chargeable 50% is subject to CGT at the main rate of 24%, producing an effective rate of 12% on the total gain. There is no upper cap on the value of shares qualifying for this treatment.

The remaining 50% — the exempt portion — is not lost permanently. It is deducted from the EOT trustees' acquisition cost of the shares, meaning it will come into charge if the trustees ever dispose of the shares in the future. In practice, most EOTs are intended to be permanent structures, so this holdover may never crystallise.

Business Asset Disposal Relief is not available on the portion of a sale where EOT relief has been claimed. BADR and EOT relief are mutually exclusive for the same disposal. The current BADR rate from 6 April 2026 is 18% on the first £1 million of qualifying gains — giving an effective rate on a £1 million qualifying gain of £180,000. By contrast, an EOT sale of £1 million with the 50% relief produces an effective CGT cost of £120,000 — still better than BADR for gains of any size, since the 12% effective EOT rate beats the 18% BADR rate without any cap.

For gains above £1 million, the comparison is even clearer. BADR applies only to the first £1 million of lifetime qualifying gains; gains above that are taxed at 24%. An EOT sale of £5 million produces an effective CGT cost of £600,000 (12% of £5 million), compared with roughly £1,140,000 on a conventional trade sale at BADR on the first £1 million and 24% on the remainder.

The sale is generally outside the scope of Inheritance Tax at the point of disposal, subject to conditions.

For employees

One of the least-discussed but most powerful aspects of the EOT structure is the ongoing benefit to employees. Once a company is majority-owned by an EOT, it can pay each eligible employee an annual cash bonus of up to £3,600 per year, free of income tax. National Insurance contributions (employee and employer) still apply to these bonuses, but the income tax saving is meaningful across the workforce.

The bonus must meet two conditions:

The participation condition: the bonus must be made available to all eligible employees. A minimum qualifying period of up to 12 months' service is permitted, so a newly hired employee can be excluded for up to their first year. From October 2024, non-executive directors can be excluded from the bonus payment without breaching the equality requirement — an important practical relaxation from the previous rules.

The equality condition: eligible employees must participate on the same terms. The business has some discretion in how it allocates the bonus and may differentiate by salary, length of service, or hours worked — but the methodology must be consistent and must not be structured to channel the benefit disproportionately to any particular group. Breaching the equality condition means the bonus becomes subject to income tax at the employee's marginal rate and, more seriously, may cause the EOT to lose its qualifying status.

3. The Qualifying Conditions for EOT Relief

The 50% CGT relief is not automatic — it must be claimed, and a series of conditions must be met both at the point of sale and on an ongoing basis.

Conditions at the point of disposal

Trading company requirement. The company must be a trading company or the holding company of a trading group. A business whose activities are predominantly investment — holding property or financial assets for income — does not qualify. Mixed trading and investment businesses require careful analysis.

Controlling interest. The EOT must acquire more than 50% of the ordinary share capital, voting rights, assets on a winding-up, and profits available for distribution. All four tests must be satisfied — a majority of issued share capital alone is not sufficient if, for example, special share rights mean the EOT does not receive more than 50% of profits.

All-employee benefit. The EOT must be established for the benefit of all employees of the company or group on the same terms. The equality requirement mirrors the bonus payment condition described above.

Participator limit. Former shareholders (and persons connected with them) who held more than 5% of the company must not constitute more than 40% of the total workforce. This prevents a scenario where the founding family effectively controls the employee base as well as the shareholding — ensuring the EOT genuinely benefits a broad employee population rather than a small group of connected individuals.

UK-resident trustees. From 30 October 2024, the trustees of the EOT must be UK tax resident. HMRC introduced this condition specifically to prevent offshore trustee arrangements being used to exploit the relief.

Independent valuation. The price paid by the EOT must represent market value. Setting the price too high risks the trustees being in breach of their fiduciary duty to act in the interests of employee-beneficiaries, and may cause HMRC to challenge the transaction. An independent share valuation from a qualified corporate finance specialist is essential.

No prior control by the EOT. The EOT must not have controlled the company in the tax year before the disposal.

Ongoing conditions

The relief can be withdrawn if a disqualifying event occurs within four tax years following the tax year of disposal. Disqualifying events include:

• The EOT ceasing to hold a controlling interest in the company
• The company ceasing to be a trading company
• The all-employee benefit condition ceasing to be met
• Former shareholders and connected persons exceeding the 40% participator limit
• The trustees ceasing to be UK resident

Annual governance and compliance checks by a qualified adviser are not optional — they are a structural requirement for maintaining the relief.

4. How the EOT Transaction Is Funded

One of the most common practical questions about EOTs is how the trust actually pays for the shares. The answer is almost always through a combination of upfront cash (from the company's existing reserves or third-party finance) and deferred consideration — a debt owed by the EOT to the selling shareholders, repaid over time from the company's future trading profits.

The typical structure works as follows:

• An initial cash payment is made on completion — typically funded from the company's existing cash pile and, where needed, a bank loan or specialist EOT finance facility
• The remainder of the consideration is left outstanding as a vendor loan from the selling shareholders to the EOT
• The company makes regular contributions to the EOT, which uses these funds to repay the vendor loan over three to ten years

From 30 October 2024, HMRC changed its view on the tax treatment of these company contributions. HMRC now treats contributions to fund the EOT's acquisition cost as distributions from the company — meaning the EOT is treated as receiving a dividend rather than a simple payment. However, a specific statutory relief exists that allows the EOT to receive these contributions tax-efficiently, and the correct tax treatment must be carefully documented and managed to ensure the relief applies.

The deferred consideration structure means that the selling shareholder does not receive all their money upfront. The full payment depends on the company continuing to generate sufficient profits over the repayment period. This is the key commercial risk of an EOT exit compared with a trade sale — the seller takes on a degree of credit risk against the future performance of the business. In exchange, they benefit from the CGT relief and the absence of the disruption and uncertainty that a trade sale or private equity process typically generates.

Paying the CGT on deferred consideration

A practical issue created by the November 2025 Budget change is the timing of the CGT liability. The full gain crystallises at the point of disposal — but for most EOT transactions, the majority of the consideration is received in instalments over several years. The CGT on the chargeable 50% of the gain is due on 31 January following the end of the tax year in which the disposal takes place.

Where the consideration is paid in instalments over a period exceeding 18 months, HMRC has the discretion to allow the CGT to be paid in corresponding instalments under section 280 TCGA 1992. However, HMRC requires that 50% of each instalment received is applied to the tax liability, and the total tax must be settled within eight years. Sellers entering an EOT transaction must plan carefully for the CGT payment timing to ensure they retain sufficient liquidity from each instalment — particularly in the early years when both the debt repayment and the tax payments fall due simultaneously.

5. EOT vs. Other Exit Routes: A Comparison

For most business owners, the EOT is one of several options being considered alongside a trade sale, a management buyout (MBO), or a private equity transaction. Each has a distinct tax and commercial profile.

Worked Example 1: EOT vs. Trade Sale vs. BADR — Same Gain, Different Route

Sarah is the sole shareholder of a professional services consultancy. An independent valuation puts the business at £3 million. Her original cost for the shares was £100,000. Her gain is therefore £2,900,000.

Option A — Trade sale (no BADR — business does not qualify):

‍Option B — Trade sale with BADR (qualifies, £1m lifetime limit already used — nil remaining):

Same as Option A: £695,280 CGT.

Option C — Sale to EOT from 26 November 2025 (50% relief):

‍Option D — Sale to EOT before 26 November 2025 (100% relief — now historic):

The November 2025 change cost Sarah £347,280 compared with the pre-Budget position — but she still saves £348,000 compared to a conventional trade sale at 24%. On a £3 million sale the EOT route remains the most tax-efficient option by a significant margin.

Worked Example 2: The Employee Bonus Benefit

Meridian Design Ltd has been EOT-owned for two years. It employs 18 people with a mix of salaries ranging from £28,000 to £85,000. The company decides to distribute the maximum income-tax-free bonus of £3,600 to all 18 eligible employees.

Every year the EOT structure is maintained, Meridian's employees collectively save £19,440 in income tax that a conventional cash bonus would have attracted. Over five years: £97,200 in income tax savings across the workforce. This benefit is available regardless of when the EOT was set up and continues indefinitely, provided the qualifying conditions are met.

6. The October 2024 Rule Changes: What Tightened and What Relaxed

The Autumn Budget 2024 introduced the most significant set of anti-avoidance changes to the EOT regime since its introduction in 2014. Most of these changes took effect from 30 October 2024. Understanding them is essential for any business considering an EOT in 2026.

What tightened

Former owner control restriction. The 2024 changes introduced explicit rules preventing former shareholders from controlling the EOT after the sale. Previously, there was concern that some EOT arrangements left former owners in effective control of the trust despite having nominally sold their shares. The new rules require the trust to be genuinely independent of former owners in its governance and decision-making.

Trustee residency. As noted above, all trustees must now be UK tax resident. Offshore trustee arrangements are specifically excluded.

Independent valuation requirement. The legislation now explicitly requires an independent valuation to be undertaken. This closes a potential gap where sellers might set the price at an inflated level, extracting more value from the company than the shares are worth.

Anti-avoidance on contributions. HMRC's change of view on EOT company contributions (treating them as distributions rather than trading payments) was announced in October 2024. This change has significant practical implications for how EOT funding arrangements are structured and documented. Specific statutory relief exists, but it must be actively claimed and carefully managed.

What relaxed

Non-executive directors excluded from bonus equality requirement. Previously, the requirement that all eligible employees receive the same terms meant that non-executive directors, who do not typically receive bonuses, were a potential problem. If an NED was an employee for tax purposes, the company faced a difficult choice between paying them a bonus they had no contractual right to or risking a breach of the equality condition. The October 2024 changes allow NEDs to be excluded from bonus payments without breaching the equality requirement — a genuinely helpful practical improvement.

7. Is an EOT Right for Your Business?

An EOT is not the right exit route for every business owner. The following framework summarises the key questions to work through before committing.

The EOT is likely to be a strong option if:

• Your business is a profitable trading company with a clear management team capable of running it independently after your departure
• You have a meaningful workforce who are genuinely engaged with the business and would benefit from collective ownership
• You value continuity of culture and independence over maximising short-term proceeds
• Your gain on disposal is large enough that the CGT saving (12% effective rate vs. 24%) is commercially significant — typically gains of £500,000 or more
• You are comfortable with deferred consideration — receiving the purchase price over several years from future profits rather than a single upfront payment
• You have no urgency for immediate liquidity (for example, you are not selling because of financial pressure on the company)

The EOT is less likely to be the right route if:

• Your business is primarily an investment vehicle, a property company, or a purely holding structure — these do not qualify as trading companies
• You need the full proceeds upfront — for example, to fund retirement, clear personal debt, or invest elsewhere
• Your business has a complex shareholder structure with multiple parties who would need to participate, creating coordination complexity
• A trade buyer or private equity investor is willing to pay a price premium that more than offsets the CGT saving — this can be the case where a strategic acquirer places a high value on your client relationships, IP, or market position
• The management team lacks the capability or confidence to run the business independently, and the company would benefit from external ownership with active strategic support

Worked Example 3: When a Trade Sale Beats an EOT

Marcus owns a specialist engineering company that has attracted interest from a strategic trade buyer willing to pay £5 million — a meaningful premium to the independently valued market price of £3.5 million. Marcus's base cost is £200,000.

Trade sale at premium price:

Despite a much higher CGT bill on the trade sale (£1,152,000 vs. £396,000), Marcus nets £744,000 more from the trade sale than the EOT, purely because the trade buyer's premium more than compensates for the additional tax. In this case, the trade sale is the better commercial outcome — the EOT's tax efficiency does not override a significant price differential.

This illustrates the fundamental principle: an EOT is a tax-efficient exit at market value. It is not a mechanism for achieving a price above market value.

8. The Process of Setting Up an EOT: A Step-by-Step Overview

For business owners who decide to proceed, the typical EOT transaction involves the following stages, generally taking three to six months from the initial decision to completion.

Step 1 — Initial assessment and feasibility. Your accountant and legal adviser review whether the business qualifies (trading company, shareholder structure, employee headcount and composition for the participator test, existing debt obligations) and model the tax position for the selling shareholders.

Step 2 — Independent share valuation. A qualified corporate finance specialist or business valuator produces an independent valuation of the shares. This is a statutory requirement and protects both the sellers and the trustees.

Step 3 — Advance clearance from HMRC. An advance statutory clearance application is submitted to HMRC under the transactions in securities anti-avoidance rules (s.701 ITA 2007). HMRC's response — confirming it would not seek to apply the anti-avoidance rules to the transaction — provides important certainty before completion. Typical response time is 30 days.

Step 4 — EOT establishment. The trust deed and trustee company are established. The trustee board is composed — typically including independent trustees and employee representatives, and excluding former shareholders from control positions under the October 2024 rules.

Step 5 — Transaction documentation. A share purchase agreement is negotiated between the selling shareholders and the trustees, setting out the price, payment structure, warranties, and protections. The deferred consideration structure and repayment schedule are documented in detail.

Step 6 — Completion. The shares are transferred to the EOT trustees. Any initial cash payment is made. The EOT becomes the majority shareholder of the company.

Step 7 — Ongoing compliance. Annual checks confirm the qualifying conditions remain met. The company's contributions to fund the deferred consideration are properly structured and documented. The employee bonus process is managed each year. Trustees meet regularly and document their decisions.

Frequently Asked Questions

What is an Employee Ownership Trust and how does it differ from employees owning shares directly?

An EOT is a trust that holds a controlling interest in a company on behalf of all employees collectively. Employees do not receive individual shares — instead, the trust holds the shares and trustees act in the interests of all employee-beneficiaries. This differs from direct share ownership schemes such as EMI, SIP, or CSOP, where individual employees receive or acquire shares in their own name. The EOT is a permanent ownership structure; individual share schemes are typically incentive arrangements for specific employees.

What CGT rate applies to a sale to an EOT in 2026/27?

For qualifying disposals made on or after 26 November 2025, 50% of the gain is exempt from CGT. The remaining 50% is chargeable at the standard CGT rate, which is 24% for higher and additional rate taxpayers on residential property and non-BADR business gains. The effective combined rate is therefore 12% (50% × 24%). There is no upper cap on the gain eligible for this treatment. For disposals made on or before 25 November 2025, the full 100% exemption applied.

Is Business Asset Disposal Relief available on an EOT sale?

No. BADR and EOT relief are mutually exclusive — you cannot claim both on the same disposal. If you claim EOT relief, BADR is not available on the exempt or chargeable portions of the same sale. Given that the effective 12% EOT rate is lower than the 18% BADR rate (which applies from 6 April 2026 and is subject to a £1 million lifetime cap), most sellers are better off claiming EOT relief rather than BADR. BADR may become relevant if the EOT relief is subsequently withdrawn following a disqualifying event.

Does my company have to be a certain size to qualify for an EOT?

No — there is no minimum or maximum size requirement. EOTs have been established by businesses with five employees and by companies with hundreds. What matters is meeting the qualifying conditions: trading company status, the controlling interest test, the all-employee benefit condition, and the participator limit. A business with a very small workforce may face practical challenges with the participator test (former shareholders with more than 5% stakes must not exceed 40% of staff), but there is no legal minimum.

Can I receive all the sale proceeds upfront in an EOT transaction?

Not typically, because the EOT itself does not have the funds to pay upfront unless the company has substantial cash reserves or third-party borrowing is available. Most EOT transactions involve a combination of upfront cash and deferred consideration paid from future company profits over several years. The total amount received depends on the company continuing to generate sufficient profit over the repayment period. If receiving all proceeds immediately is a priority, a trade sale or private equity transaction may be more suitable.

What is a disqualifying event and what happens if one occurs?

A disqualifying event is something that causes the EOT to cease meeting the qualifying conditions within four tax years following the tax year of disposal. Examples include the EOT losing its controlling interest in the company, the company ceasing to trade, the all-employee benefit condition being breached, or the trustees ceasing to be UK resident. If a disqualifying event occurs, the CGT relief already claimed is withdrawn and the full gain (or the previously exempt portion) becomes chargeable. This underlines the importance of ongoing compliance and annual governance checks.

Can I retain a role in the business after selling to an EOT?

Yes. Selling to an EOT does not require you to leave the business immediately. Many founders remain as directors, consultants, or employees following the sale, often for a transitional period of one to five years. The key requirement is that you cannot control the EOT as a trustee — from October 2024, former shareholders are excluded from positions of control over the trust, even if they remain employed by the company. You may, however, remain on the company's board of directors in a commercial capacity.

Does an EOT have any Inheritance Tax advantages?

The disposal of shares to an EOT is generally not a chargeable transfer for IHT purposes at the point of sale, provided the qualifying conditions are met. Once established, an EOT is structured to fall outside the relevant property regime (the regime that subjects many trusts to ten-year periodic charges and exit charges). This is an additional attraction for founders considering estate planning alongside business exit. However, the IHT treatment is complex and depends on specific trust structuring — always take specialist advice.

How long does it take to set up an EOT?

A typical EOT transaction takes three to six months from the initial decision to completion, depending on the complexity of the business structure, the speed of the independent valuation, and the time required to obtain HMRC advance clearance. HMRC typically responds to advance clearance applications within 30 days. Transactions involving complex group structures, multiple shareholders, or significant third-party financing may take longer.

What are the ongoing costs of running an EOT?

Annual ongoing costs include trustee fees (if professional trustees are engaged), accountancy and legal fees for annual compliance reviews, the cost of the annual employee bonus administration, and any costs associated with employee communications and governance. For a straightforward EOT-owned trading company with 20 employees, annual compliance costs are typically in the range of £5,000–£15,000 per year. These costs are generally borne by the trading company as legitimate business expenses.

What happened to EOT contributions after October 2024?

HMRC announced in October 2024 that it would treat contributions a company makes to an EOT to fund the acquisition cost of shares as distributions for tax purposes — a significant change from HMRC's previous approach. A specific statutory relief exists under which the EOT can claim that such distributions are not chargeable, but this relief must be actively claimed by the EOT's trustees and the payments must be properly documented. Contributions made for other purposes — such as ongoing running costs of the trust — are outside this relief and may be treated as taxable income of the EOT. Given the complexity and ongoing uncertainty in this area, detailed specialist advice at the outset is essential.

Is an EOT better than a management buyout?

It depends on your priorities. An MBO is a sale to your management team, typically funded by bank debt and sometimes private equity investment. It can achieve a higher price than an EOT (because the management team is competing with other buyers and has a strong commercial incentive to pay a premium), and the consideration is typically paid upfront. However, an MBO removes employee ownership entirely — the benefit flows to the management buyers rather than all staff. An EOT, by contrast, retains a broad employee-ownership culture and offers the CGT benefit at market value. For founders who value legacy, culture, and staff welfare as much as price, the EOT is often the preferred route. For founders whose primary objective is maximum short-term proceeds, an MBO or trade sale may produce a better commercial outcome despite a higher CGT bill.

What CoreAcc Accountants Can Help You With

EOT transactions combine complex CGT analysis, corporate law, trust structuring, HMRC clearance, and ongoing governance — all of which interact in ways that require specialist knowledge across multiple disciplines. We do not handle every aspect of an EOT in-house, but as your trusted accountant and business adviser we play a central coordinating role in the process and ensure you have the right specialists around the table.

At CoreAcc Accountants, we can help you with:

• Feasibility assessment: Reviewing your business structure, shareholder composition, employee headcount, and tax position to determine whether an EOT is a realistic option and what the CGT position would look like
• Exit planning and comparison modelling: Modelling the EOT against alternative exit routes (trade sale, MBO, BADR disposal) to give you a clear picture of the net-of-tax proceeds under each scenario
• HMRC advance clearance preparation: Preparing and submitting the statutory clearance application under the transactions in securities anti-avoidance rules
• Coordinating the specialist team: Introducing you to qualified corporate finance valuers and specialist EOT solicitors where needed, and coordinating the process through to completion
• Ongoing annual compliance: Annual reviews of the qualifying conditions, trustee governance documentation, bonus payment procedures, and corporation tax returns for the trading company
• Employee bonus planning: Calculating the optimal bonus distribution each year and ensuring the participation and equality conditions are correctly met

Get in Touch

If you are considering selling your business in the next one to three years and want to understand whether an EOT could be the right route, the starting point is a conversation with us. We can assess your business quickly, model the tax position under different scenarios, and help you decide whether an EOT deserves further investigation.

EOT transactions take time to prepare properly — particularly the independent valuation and HMRC clearance process. Starting the conversation early gives you more options and more time to make the right decision.

CoreAcc Accountants is an ACCA-accredited firm of Chartered Certified Accountants based in Borehamwood, Hertfordshire. This article was last reviewed in July 2026 and reflects legislation in force at that date, including the changes introduced by the Autumn Budget 2024 (effective 30 October 2024) and the Autumn Budget 2025 (effective 26 November 2025). It does not constitute tax, legal, or financial advice. EOT transactions are complex — always seek specialist advice tailored to your individual circumstances.

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