We are experts in all aspects of employee ownership busienss and our partner Alex has assisted many businesses transitioning into an employee owned busienss.
We have implemented employee ownership trust for many business in the UK and in doing so we have prefect the steps to getting to the end goal!

What is employee ownership?
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An Employee Ownership Trust (EOT) is a unique type of employee benefit trust introduced by the UK Government in September 2014. It was designed to encourage more business owners to adopt a structure similar to the John Lewis model, helping to widen employee ownership through an indirect shareholding.
To support this shift, the Government offers generous tax incentives for owners who choose to sell their business to an EOT. That said, there are specific requirements around how the employee ownership must be structured in order to qualify for these benefits.
Although the tax relief is primarily aimed at companies, partnerships aren't excluded. With the right planning, a partnership can be incorporated, allowing the former partners—now shareholders—to eventually sell their shares to an EOT as part of their succession or exit strategy.

Why are business owners choosing employee ownership?

Many business owners are choosing sale to an EOT as a succession option, rather than sale to a third party, or a conventional internal exit route like a management buy-out.

Selling to an Employee Ownership Trust (EOT) comes with a range of benefits for shareholders. Here are some of the main advantages:

• A ready buyer, no cost to employees: One of the biggest perks is that employees can indirectly buy the business without needing to use their own money. This creates an immediate buyer for the company and helps solve succession planning challenges.
• Fair market value for your shares: Shareholders can sell their shares for full market value, based on an independent valuation. Under the draft Finance Bill 2024, the EOT Trustee must ensure the price doesn’t go above the fair market value, and if part of the payment is deferred, any interest charged needs to be at a reasonable commercial rate.
• Attractive tax reliefs: When selling a controlling interest to an EOT, there’s usually no capital gains tax, income tax, or inheritance tax to pay—either on the sale itself or when receiving the proceeds.
• Flexibility for shareholders: Not everyone has to sell their shares at once. Some shareholders can choose to retain their stake, giving flexibility around how and when the transition takes place.
• Leadership can stay the same: Directors can stay on after the sale and continue to receive a competitive salary, helping to maintain stability and confidence within the business.
• A smoother, friendlier sale: EOTs are generally seen as more “friendly” buyers. This often means a quicker, less stressful sale process—with potentially lower professional fees.

Benefits for the Company and Its Employees moving to an Employee Ownership Trust (EOT) structure doesn’t just benefit shareholders—it brings real advantages for the business and its people too.
Because all employees gain an indirect stake in the company, ownership tends to drive positive cultural and performance shifts, including:

• Higher employee engagement and loyalty: When employees have a meaningful connection to the business, they’re more motivated and committed to its success.
• Lower absenteeism: A more engaged workforce often means fewer days off and stronger team reliability.
• More innovation: With everyone feeling invested, employees are more likely to contribute ideas and improvements.
• Stronger overall performance: Businesses owned by EOTs often see improved results thanks to a more motivated, collaborative team.

Plus, there’s a direct financial benefit: companies controlled by an EOT can pay tax-free cash bonuses of up to £3,600 per employee per year—a great way to reward staff and share in the success of the business.

​Employee Ownership Trust (EOT) Q&A

What is an EOT?
It’s a special form of trust set up similar to the corporate structure set up by John Lewis, the aim is to facilitate wider employee ownership.

How does a sale to an EOT work?

1. A qualifying EOT will be established with a corporate as the trustee of the EOT (the Trustee Company).
2. The shareholders sell their shares to the Trustee Company under a share purchase agreement. The shareholders and the Trustee Company will jointly engage a share valuation expert to value the company: the Trustee Company will use this value as the basis for determining the purchase price. On the sale of the shares, the purchase price will create a debt owed by the Trustee Company to the shareholders which will be left outstanding.
3. The company will continue to generate trading profits each year and it will use these profits to make contributions to the EOT. The EOT will use these contributions to repay the outstanding purchase price that it owes to the shareholders.

But my business is held as a partnership?
This tax break is aimed at companies but there is no reason why you couldn’t incorporate your business now so when the time comes for an exit the shareholders can sell their shares to an EOT.

​What are the advantages of selling to an EOT?
There are many advantages for shareholders, some of which we’ve highlighted below.

• It allows employees to indirectly buy the company from its shareholders without them having to use their own funds - thereby creating an immediate purchaser and addressing succession issues
• Shareholders can sell their shares for full market value (an independent valuation will be required)
• No capital gains, income or inheritance tax liabilities should arise on the disposal of a controlling interest in a company to an EOT (or on the subsequent receipt of the purchase price by the former shareholders)
• Not all shareholders are required to sell their shares to the EOT
• The directors can remain in situ post-disposal and can continue to receive market-competitive remuneration packages
• The EOT is generally seen as a “friendlier purchaser” which means the sale process may be quicker, with potentially lower fees.

What are the advantages for the company and employees?
As all employees get an indirect stake in the company there are substantial practical benefits associated with being owned by an EOT, such as:

• Greater employee engagement and commitment
• Reduced absenteeism
• Greater drive for innovation
• Improved business performance.

Companies controlled by EOTs are also able to pay tax-free cash bonuses to their employees of up to £3,600 per employee per year.

Key qualifying conditions
To carry out a qualify sale to an EOT there are five key conditions to meet:

1. The company whose shares are transferred must be a trading company or the principal company of a trading group
2. The trustees of the EOT must restrict the application of any settled property (the shares) for the benefit of all eligible employees on the “same terms”
3. The trustees must retain, on an ongoing basis, at least a 51% controlling interest in the company
4. The number of continuing shareholders (and any other 5% participators) who are directors or employees (and any persons connected with such employees or directors) must not exceed 40% of the total number of employees of the company or group
5. Trust property must generally be applied for the benefit of all eligible employees on the same terms but the trustees may distinguish between employees on the basis of remuneration, length of service and hours worked.

I am worried about losing control of the company and not being paid?
The way we structure the transaction ensures that you maintain voting control until you have been paid, this is done through setting up a redeemable shares which is only redeemed once the former shareholders have been fully paid for their shares.

How is the bonus paid to the employees and is there tax and NI to be paid on the bonus?
Cash bonus of up to £3,600 per employee per year can be paid free of Tax but not NI. This bonus must be paid to all qualifying employee on an equal and fair basis.

​What if the EOT does not pay me?
We have built in mechanisms in the share sale purchase agreement to ensure that there are advantages for the EOT to pay the shareholders as soon as possible (as soon as profits in the trading company allows for this) otherwise there will be interest charges applicable on the EOT and also through the redeemable share which will allow you to out vote the EOT until you have been paid fully.
 
Please feel free to contact us if you have any other questions about EOT’s that have not been covered here.