FAQs

For Business Owners

What is an Employee Ownership Trust (EOT)?

An EOT is a UK trust that buys and holds a controlling interest (usually 100%) in a trading company for the long-term benefit of all employees. It’s designed to secure independence, succession and broad-based employee benefit.

If the qualifying conditions are met, sellers can claim 50% Capital Gains Tax relief on the sale proceeds (capital element only). Under current rates of CGT this means a 12% tax on the proceeds instead of 24%. Interest on any deferred consideration is taxable as income in the normal way.

Broadly, the EOT must control the company after the sale, meeting the “all-employee benefit” requirement and related conditions set out in the Capital Gains Tax rules. In practical terms, most transitions sell a majority or 100% of the ordinary share capital to the EOT.

Yes, EOT acquisitions are still subject to 0.5% Stamp Duty on share transfers in the usual way. (The EOT relief is a Capital Gains Tax relief for sellers; it does not remove Stamp Duty.)

It must be market value. Sellers and Trustees should be able to evidence a robust independent valuation. HMRC guidance expects the trustees to take reasonable steps to ensure both price and any interest rate are commercially reasonable.

Commonly via a modest upfront payment and a vendor loan repaid over time from company profits contributed to the EOT, while maintaining headroom for working capital, investment and a tax-free all-employee bonus.

Events such as the EOT ceasing to control the company, or the trust applying benefits other than on the required all-employee basis, can disqualify the tax incentives and trigger a clawback from sellers or the EOT. Good governance and careful drafting help avoid them; trustees and the board should monitor compliance carefully.

Yes, through pay, discretionary bonuses, LTIPs or tax-advantaged options like EMI share schemes, provided these operate alongside (not in place of) the EOT’s all-employee benefit principles. Care needs to be taken that such schemes do not create unintended friction in the future.

For Employees

Do employees become shareholders?

No. The EOT trustee is the shareholder; employees are beneficiaries of the trust. They can receive profit share and benefit from long-term stewardship, but they do not hold personal shares unless a separate share scheme is used.

Companies controlled by a qualifying EOT can pay a tax-free bonus up to £3,600 per employee per tax year. It must be offered on the same terms to all employees, with any variations only by reference to pay, length of service or hours worked. National Insurance still applies.

All employees qualify on equal terms. This includes former owners and shareholders if they continue to work for the Company. Directors can be excluded if desired. Employees who have not completed a minimum service period (maximum 12 months) can be excluded. Employees who have committed gross misconduct or are subject to a potential gross misconduct can be excluded pending the outcome.

It’s also known as the ‘profit share’, the ‘employee dividend’ but HMRC calls it a Bonus.

The company board generally proposes the bonus pool based on performance and affordability; the trustees may then confirm that any payment complies with the all-employee rules and trust deed. Scheme rules normally set this process out.

Good practice includes employee voice mechanisms (e.g., elected employee trustee directors or forums). Your company’s articles and trust deed will specify the governance model.

For Lenders & Investors

Is an EOT compatible with bank funding?

Yes. Funding can include senior debt alongside vendor loans, with the trustee’s duties and repayment waterfall documented clearly so that working capital and covenant headroom are protected. (Typical protections sit in the SPA, trust deed and company articles.)

Typical structures include arm’s-length interest rates, fixed repayment schedules, minority-protection dividend clauses and restrictions on related-party transactions, plus trustee oversight and reserved matters.

Governance & Compliance

What documents implement an EOT?

Core documents usually include: the EOT trust deed, Share Purchase Agreement, revised company articles, a founder/shareholder agreement, trustee company articles, a profit share scheme, and associated minutes/resolutions/filings.

Conflicts are managed by disclosure and authorisation rules in the trust deed and trustee company articles. Decisions must be taken in the best interests of the beneficiaries as a whole, not any individual.

Protocols to ensure that the EOT maintains control of the company and continues to meet the all-employee benefit requirement; confirm bonus compliance with ITEPA rules; and ensure board/trustee processes follow the documents. Keep cash-flow forecasts under review.

HMRC’s 2025 qualitative evaluation reports increased focus on succession, employee engagement and business continuity as common motivations and outcomes for employee ownership.

Transaction Mechanics

Can founders keep a minority shareholding?

Yes, provided the EOT acquires and retains control. Limits restrict the founders from obtaining any veto / reserve rights over the company or the Trust.

Yes, but the trustees must decide that a sale is in the beneficiaries’ best interests and remain within the trust’s powers and legislation. Documents often include drag/tag and valuation provisions for orderly outcomes. It should be noted that the Trust inherits the founder’s CGT baseline (for EOTs completed before 26 November 2025 and 50% of the founder’s baseline (for projects on or after that date), meaning that the EOT would pay significantly more tax on a sale.

Plan for legal drafting, valuation, financial modelling, trustee company setup and employee communications. Many deals complete in a few months, but timing depends on readiness, funding and diligence.

Employee Bonus (Technical)

What’s the legal basis for the £3,600 tax-free bonus?

ITEPA 2003 ss.312A–312I. Key points: same-terms requirement, with permitted variations only by remuneration, length of service and hours worked; PAYE still operates for NICs; directors/employees are included on the same basis.

Adopt scheme rules setting the pool, eligibility, pro-rating, treatment of starters/leavers, discipline exclusions (carefully and lawfully framed), payment mechanics and trustee sign-off.

Risk & Safeguards

What are the biggest legal pitfalls?

Over-paying above market value, failing to maintain EOT control, breaching the all-employee benefit rule (e.g., conferring selective benefits from trust property), and weak governance/conflict management. Strong drafting and trustee oversight mitigate these.

Independent valuation addressed to the Trustees, clear financial model for debt service, and board/trustee papers showing the decision-making process, aligning with HMRC’s expectations around market value and reasonable commercial rates.