Exit Your Business Without a CGT Bill
Employee Ownership Trusts (EOTs): Why More UK Business Owners Are Choosing a Tax-Efficient Exit
For many business owners, selling a company is one of the most significant financial decisions they’ll ever make. Traditionally, this meant finding an external buyer, selling to a competitor, or passing the business on to family members.
However, an increasing number of UK entrepreneurs are choosing a different route: selling their business to their employees through an Employee Ownership Trust (EOT).
Recent figures show a sharp rise in businesses adopting employee ownership models, with hundreds of new Employee Ownership Trusts being established each year. As business owners seek tax-efficient succession plans and employees look for greater involvement in business success, EOTs are becoming an increasingly attractive solution.
At Folkes Worton, we help business owners understand whether employee ownership could be the right strategy for their long-term exit plans.
What Is an Employee Ownership Trust?
An Employee Ownership Trust (EOT) is a special type of trust that acquires a controlling interest in a company on behalf of its employees.
Once established, the trust becomes the majority shareholder, holding the shares for the benefit of the workforce.
Unlike traditional share schemes, employees do not have to buy shares themselves. Instead, ownership is held collectively by the trust, ensuring all eligible employees can benefit from the company’s future success.
Some of the UK’s best-known employee-owned businesses include:
- John Lewis Partnership
- Richer Sounds
- Riverford Organic Farmers
- A growing number of professional service firms and SMEs
Employee ownership has become increasingly popular among business owners seeking a smooth and sustainable transition while protecting their company’s culture and legacy.
Why Are Employee Ownership Trusts Growing in Popularity?
Recent HMRC data shows a significant increase in businesses adopting employee ownership structures.
This growth is being driven by several factors:
One of the biggest attractions for business owners is the favourable tax treatment available when selling to an EOT.
Many business owners struggle to find suitable external buyers or family successors.
An EOT can provide an alternative route that keeps the business independent while rewarding employees.
Research consistently suggests that employees who have a meaningful stake in business success are often more engaged, productive and committed to long-term growth.
Selling to an outside investor can bring significant operational changes.
Employee ownership often helps preserve the values and culture that have contributed to the business’s success.
One of the biggest attractions for business owners is the favourable tax treatment available when selling to an EOT.
Many business owners struggle to find suitable external buyers or family successors.
An EOT can provide an alternative route that keeps the business independent while rewarding employees.
Research consistently suggests that employees who have a meaningful stake in business success are often more engaged, productive and committed to long-term growth.
Selling to an outside investor can bring significant operational changes.
Employee ownership often helps preserve the values and culture that have contributed to the business’s success.
The Major Tax Benefit: Capital Gains Tax Relief
For many business owners, the most compelling advantage of an Employee Ownership Trust is the potential Capital Gains Tax (CGT) exemption.
Typically, when selling a business, owners may face a CGT liability on the gain arising from the sale.
While Business Asset Disposal Relief (formerly Entrepreneurs’ Relief) can reduce the rate of CGT in certain circumstances, the relief is subject to eligibility conditions and lifetime limits.
In contrast, where qualifying conditions are met, a sale to an Employee Ownership Trust can be completed with no Capital Gains Tax payable on the disposal.
This can create substantial tax savings, particularly for owners of successful businesses with significant value.
How Does an Employee Ownership Trust Work?
The process usually involves several stages:
1. Business Valuation
The company is independently valued to determine its market value.
A professional valuation is essential to ensure compliance with HMRC requirements and to protect all parties involved.
2. Trust Establishment
An Employee Ownership Trust is created and governed by trustees.
The trustee board often includes:
- Company directors
- Employee representatives
- Independent trustees
- Professional advisers
3. Acquisition of Shares
The trust acquires a controlling stake in the company, usually more than 50%.
The former owner may retain a minority shareholding and may continue working within the business if desired.
4. Payment to the Seller
Unlike a traditional sale where the purchase price is received immediately, EOT transactions are often funded over time.
The company generates profits which are used to fund payments to the trust and ultimately the former owner.
This means sellers often receive the sale proceeds in instalments over several years.
Benefits for Employees
One of the unique aspects of an Employee Ownership Trust is that employees do not typically have to invest their own money to participate.
Instead, they gain an indirect stake in the company’s future through the trust structure.
Potential benefits include:
- Greater involvement in business success
- Improved employee engagement
- Increased job satisfaction
- Potential profit-sharing opportunities
- Stronger long-term business stability
Eligible employees may also receive tax-free bonuses of up to £3,600 per year under current EOT rules, subject to qualifying conditions.
Is an Employee Ownership Trust Right for Every Business?
While EOTs offer significant advantages, they are not suitable for every company.
Business owners should carefully consider factors such as:
Delayed Sale Proceeds
Unlike a conventional business sale, payment is often spread over several years.
Commercial Risk
Future payments depend on the company’s continued performance and profitability.
Professional Costs
Setting up an Employee Ownership Trust requires:
- Business valuation
- Legal advice
- Tax planning
- Trust establishment
- Ongoing administration
Valuation Considerations
The sale price must represent a fair market value and may differ from the price available from a third-party commercial buyer.
Key Questions Business Owners Should Ask
Before considering an Employee Ownership Trust, it is worth asking:
- Do I have a succession plan?
- Is there a suitable external buyer available?
- Do I want to preserve the company’s culture?
- Am I comfortable receiving proceeds over time?
- Could a CGT-free sale improve my overall exit strategy?
- Would employee ownership support the long-term success of the business?
Professional advice is essential to assess whether an EOT aligns with your personal, financial and commercial objectives.
How Folkes Worton Can Help
We work closely with business owners who are considering succession planning, company sales and tax-efficient exit strategies.
Our specialists can help you:
- Assess EOT suitability
- Review tax implications
- Structure transactions efficiently
- Plan succession strategies
- Navigate HMRC requirements
- Protect long-term business value
Whether you’re planning retirement, seeking a tax-efficient exit, or looking to reward your employees, an Employee Ownership Trust may provide a compelling solution.
Speak to us today on 01384 376 964 to explore whether employee ownership could form part of your business exit strategy.
Folkes Worton LLP Chartered Accountants
Accounting for the Future