Are EOTs still popular following 2024’s Autumn Budget?

This insight is part of our Legal Business News | Winter 2025 series. Explore the full series at the end of this piece.

An employee ownership trust (EOT) is a specific type of employee benefit trust which enables the shares in a company to be held for the benefit of its employees. This allows employees to indirectly have a significant and meaningful stake in their employer’s business (an employee-owned or EO business).
The EOT structure was introduced in 2014, since when EOTs have been gaining popularity. The Employee Ownership Association indicates that there are over 2,000 EO businesses in the UK. Riverford and Lush are some of the more well-known EO businesses.

For company founders, an EOT provides an attractive alternative exit option to a third-party sale or a traditional management buy-out. Selling shareholders can receive market value for the sale of their shares, usually via a combination of a completion payment from the EO company’s existing cash reserves and deferred consideration payments that are funded by future profits of the business.

When implemented carefully, EOTs provide advantages for selling shareholders, EO businesses and, of course, employees of EO businesses.

If you would like to find out more about EOTs, please visit our dedicated website EOT page.

The 2024 Autumn Budget introduced some changes to the requirements for EOTs, which we wrote about here. The changes are to make the rules more robust and ensure that EOTs are used for their intended purpose of benefiting employees rather than for tax avoidance. The Budget also increased capital gains tax (CGT), but not for EOTs. Here, we discuss whether the tightening of the rules for EOTs will make them less popular, or even more popular given the CGT and other advantages.

What are the main benefits of an EOT?

There remain huge benefits for EO businesses. Below is a snapshot of the top three:

Tax benefits

Selling shareholders can sell their shares to the EOT without incurring a CGT liability. This feature makes them very popular for business owners.
There are several important requirements that must be met to achieve this tax treatment, one of which is that the EOT must acquire a controlling interest in the EO company.

From an employee’s perspective, they can benefit from a bonus each tax year of up to £3,600 which although tax-free is still subject to NIC’s.

Legacy and succession

Employee ownership can provide a successful exit route for the selling shareholders. Founders who transition their business to employee ownership can feel reassured that they have created a lasting, sustainable business to pass on to their employees. This allows the next generation of business leaders to take the reins and move the business forward in the new, EO business model.

Increased employee engagement and productivity

According to research commissioned by the Employee Ownership Association, EO businesses invest more in employee health and wellbeing and create a happier and more engaged workforce. Their research also calculated that EO businesses are more productive than other businesses, and that 57% of EO businesses reported their profits increased since becoming employee-owned.

Three key changes to EOTs in the Budget

The changes to EOTs introduced by the Budget mean that there will be some additional requirements for businesses wishing to become employee-owned and for selling shareholders. These changes mean that businesses need to comply with additional processes before the EOT is established, as part of the terms of documenting the EOT transaction and following completion.

Before an EOT transaction, to ascertain what the EOT should pay the sellers, the proposed EO business must be valued. The Budget tightened the rules on valuing businesses by requiring trustees to take ‘reasonable steps’ to ensure that the amount paid for the business does not exceed the market value of the business.

The Budget introduced additional restrictions on EOTs aimed at preventing former business owners from retaining control of the EO business after the sale. Specifically, former business owners must not indirectly control the EO business by controlling the EOT. Careful planning and implementation of the EOT arrangements should prevent former owners from exerting undue influence over the trust’s operations.

Following completion of an EOT transaction, the EO business must continue to meet certain qualifying conditions for a period of four tax years (extended by the Budget from one tax year) for the sellers to benefit from the capital gains tax (CGT) relief. If a disqualifying event occurs within four tax years, the selling shareholders lose their CGT relief.

Help from the experts

Business owners who are considering selling their business to an EOT must obtain specialist legal, tax and valuations advice from the outset. Additionally, trustees of proposed EOTs should also consider seeking professional advice, particularly regarding the valuation, before going ahead.

Moore Kingston Smith provides a seamless integrated advisory service encompassing all aspects of EOTs. We recently advised Athona Limited on becoming employee-owned and Dan Shoben, Finance and Operations Director, said:

“We are very pleased with the services we have received from our team at Moore Kingston Smith. We were working to a tight timeline, and they were always available, responsive and ensured all deadlines were met.”

If you are considering exit strategies and would like to know more about EOTs and whether it would be the right option for you, please get in touch.