Thinking of transitioning your business to employee ownership? An Employee Ownership Trust (EOT) may offer the ideal solution – but before you go too far down the road, it’s worth taking a step back and asking the right questions.
Employee Ownership Trusts (EOTs) are increasingly seen as a smart, sustainable succession option for business owners looking to exit. They offer generous tax reliefs, preserve company culture, and create a genuine sense of shared purpose among employees.
But an EOT isn’t something to drift into. If you’re considering this route, here are 10 key questions you need to be able to answer first.
1. Do you meet the legal criteria for an EOT?
There are strict conditions under the tax legislation to qualify for the generous Capital Gains Tax relief and the employee income tax bonus. Among them:
The company must be trading (not an investment vehicle);
The EOT must acquire a controlling interest (over 50%);
The number of 5%+ employee shareholders must not exceed 40% of total staff (known as the Limited Participation Requirement).
Get clear on this early – it’s the legal foundation of the entire structure.
2. What is the business worth – and is it a robust valuation?
Trustees are required to ensure the Trust doesn’t pay more than “market value” for the shares. That means having a professional, justifiable valuation – not one based on hope or back-of-envelope maths.
A realistic valuation protects the tax treatment and gives comfort to all parties.
3. Is an EOT the best exit route for you?
There may be trade buyers, private equity interest, or a management buy-out option available. Each route has pros and cons. An EOT offers stability and long-term stewardship – but not usually the highest upfront price.
Think clearly about your goals: legacy, price, timing, and future involvement.
4. How will the transaction be funded?
EOTs typically pay an initial sum on completion, with the balance paid over time from future profits. This is called Deferred Consideration. Can the business support those repayments while remaining financially healthy?
Get your forecasts in place and be realistic about the repayment schedule.
5. Is there scope to pay profit shares to employees?
One of the major employee benefits is the ability to receive up to £3,600 per year tax-free (subject to certain conditions). But this depends on profitability – and only applies if the EOT remains qualifying.
Be open with employees about what’s possible – and what isn’t.
6. Who will sit on the trustee board?
Founders must not hold more than a minority of trustee positions. Instead, expect to appoint a combination of employee representatives, independents, and possibly one or two founder trustees (as long as they remain in the minority).
Getting this right builds trust and meets the EOT legal requirements.
7. Are you ready to step back from control?
Under EOT rules, founders must not retain control. No hidden veto rights. No golden shares. Once the Trust owns the majority, real governance powers shift.
If you’re not ready to let go, it may be worth rethinking your timing.
8. How will you support employee engagement?
Employees don’t automatically feel “like owners” just because a trust now owns the shares. Consider how you’ll explain the structure, introduce the EOT, and possibly set up an employee forum.
Strong communication and involvement will be essential in year one.
9. Have you reviewed your company’s governance and documents?
The shift to employee ownership affects your Articles, shareholder agreements, and profit distribution policies. These must reflect the Trust’s new role, the deferred consideration obligations, and minority shareholder protections.
It’s more than a sale – it’s a corporate governance refresh.
10. Do you have experienced advisers around the table?
EOTs are a specialist area. You’ll need legal and tax advisers familiar with:
TCGA 1992 (section 236H-U) – seller tax relief
ITEPA 2003 (section 312A-I) – employee profit share
Trust law, company law, and commercial structuring
The right team can make the difference between a smooth transition and a legal headache.
Final Thoughts
EOTs offer a unique and increasingly popular route for business succession – but they require care, planning, and clarity from the outset.
This checklist isn’t exhaustive, but if you’re answering most of these questions confidently, you’re likely on the right track.
If you’d like tailored advice, a feasibility review, or just a second opinion on your thinking – we’re here to help.
Want to discuss whether an EOT is right for your business?
Get in touch – Book a Consultation free!
