An Employee Ownership Trust (EOT) is a structure in which the owner of a UK business sells a controlling stake. More than 50% of the shares. To a trust that holds the shares on behalf of all employees. The October 2024 Budget removed the capital gains tax exemption that previously made EOTs uniquely attractive. EOTs remain a viable exit route, but the financial case now depends on the owner's values and legacy goals as much as on tax efficiency.

Following the Budget changes, sellers now pay CGT on a disposal to an EOT at the standard rates. 18% within the £1m BADR lifetime limit, 24% above it. The same as any other qualifying business disposal. What remains is the annual employee bonus exemption (up to £3,600 per employee per year, free of income tax) and the structural benefit of keeping the business independent and employee-controlled.

How does an EOT work in practice?

The owner sells shares to a newly created trust at market value. The trust is funded in two ways: the business's existing cash reserves (typically used for an initial payment to the seller) and deferred consideration, which the business pays out of future profits over an agreed period. Usually three to seven years.

Employees do not invest any capital. They become beneficiaries of the trust, which means they benefit from the business's success through the annual bonus exemption and, ultimately, through the value the trust holds on their behalf.

Who controls the business after an EOT sale?

The trust is governed by trustees, who must include at least one employee representative. The management team continues to run the business day to day. The owner typically steps back from executive management, though many founders stay on in an advisory capacity for a transition period.

The critical governance point is that the trust. Not the employees individually. Holds the shares. Employees do not hold shares directly and cannot individually sell them. This protects the structure from fragmentation.

What does the seller actually receive?

The seller receives the market value of the shares they sell, paid over time. On a business worth £5m:

  • An initial cash payment (typically 20 to 30% of the consideration, paid from business cash) at completion
  • Deferred consideration paid from business profits over three to seven years
  • Interest on the deferred balance (a commercial rate is typically agreed)

The seller is paid in full at market value. The structure is not a gift. The business pays the full price, it simply does so over time rather than upfront.

The annual employee bonus exemption

Under the EOT structure, the company can pay all employees a tax-free bonus of up to £3,600 per year. This is one of the remaining financial advantages of the EOT structure post-Budget. The bonus exemption is unavailable outside of employee ownership structures. For a business with 50 employees, this represents a potential annual benefit of £180,000 in income tax savings across the workforce.

Frequently asked questions

Was the CGT exemption on EOT sales removed permanently? Yes. The zero-CGT rate on disposals to EOTs was removed for transactions completing after 30 October 2024. It has not been reinstated. Sellers completing EOT transactions now pay CGT at the same rates as any other qualifying disposal.

Can I still benefit from BADR on an EOT sale? Yes. BADR applies to EOT disposals in the same way as other qualifying disposals. 18% on gains within the £1m lifetime limit, 24% above it. The BADR qualifying conditions (5% shareholding, officer/employee status, two-year holding period) must be met.

How is the business valued for an EOT sale? The shares must be sold to the trust at market value, agreed with HMRC. Overpaying by the trust carries tax risk. HMRC will scrutinise the valuation. An independent business valuation from a qualified firm is standard practice.

What happens if the business cannot generate enough cash to pay the deferred consideration? The seller bears the credit risk on the deferred consideration. If the business performs poorly, the payments may be delayed or reduced. This is the primary financial risk of an EOT structure compared to an upfront cash sale. It is mitigated by understanding the business's cash generation capacity and structuring the payment schedule conservatively.

Is an EOT suitable for any business? No. EOTs work best for profitable, cash-generative businesses with stable revenue. The trust needs to fund the deferred consideration from business cash. High capital requirements, cyclical revenue, or a business that needs significant reinvestment make the EOT structure harder to fund.