Employee ownership trusts, or EOTs as they are known, have seen a tremendous surge in popularity over the past decade, with circa 550 businesses converting to employee ownership during 2024 (the most recently available figures). For many business owners, they’ve offered an attractive route to exit or succession while keeping the culture, values and independence of the business intact.
Until recently, they’ve also been widely seen as a tax-efficient exit strategy. That combination of commercial continuity and favourable tax treatment made EOTs a compelling choice for owners who wanted to step back without selling to a trade buyer or private equity.
However, since the November 2025 budget the landscape has shifted considerably. While EOTs remain a valuable structure, the focus is moving firmly away from tax efficiency alone and back towards the underlying purpose of employee ownership.
In this short article, we’ll examine the changes and what they mean for your business if you’re considering an exit strategy that includes an EOT.
What is an employee ownership trust?
An EOT is a specific type of trust that acquires and holds a controlling interest in a trading company on behalf of its employees.
The trust will purchase more than 50 percent of the company’s shares from the existing owners, often purchasing all of the shares in the company. Those owners will usually exit immediately but are frequently paid out over time, often funded through future company profits rather than external borrowing.
EOTs are commonly used as part of succession planning where:
- the founders or shareholders are looking to retire or reduce their involvement
- there is no obvious family successor or management team wanting to take the business on;
- a trade sale or sale to private equity is not aligned with the business’s long-term values; and
- the owners want to protect jobs, culture and independence.
Historically, EOTs have offered several key benefits:
- Continuity of ethos and leadership – the business continues to operate for the benefit of its employees rather than external investors.
- Employee engagement – staff have a clear stake in the long-term success of the company (even if they do not individually hold shares – which are held by the EOT on their behalf) which helps with employee motivation and retention.
- Succession flexibility – Whilst owners will frequently sell 100% of their shares on exit, EOT’s, if structured correctly, can allow owners to exit gradually over a period of time rather than through a single disposal event.
- Tax advantages – most notably, capital gains tax relief on qualifying disposals (i.e. 0% tax payable on the sale proceeds) and the ability to pay employees income tax-free bonuses within set limits (currently £3,600 per annum per employee).
It’s that final point, and particularly the effective 0% capital gains tax rate on the sale proceeds, that has driven much of the recent scrutiny and could be a deciding factor on whether an EOT is still a good option for your exit strategy.
What’s changed?
In the 2025 November budget, the government introduced reforms designed to tighten the tax treatment of EOTs. There have also been other changes over recent years to ensure EOTs are being used for genuine employee ownership rather than primarily as a tax planning tool.
In broad terms, the changes include:
- A reduction in the capital gains tax advantage available to selling shareholders, meaning disposals to EOTs are no longer tax free as the relief has been cut from 100% to 50% meaning lower rate tax payers would be paying 9% capital gains tax on the sale proceeds and higher rate tax payers would be paying 12% capital gains tax on the sale proceeds (i.e. half of the standard 24% capital gains tax rate for higher rate taxpayers).
- Stricter conditions around control and governance, limiting the ability of former owners to retain influence in a way that undermines true employee ownership where independent/employee control of the EOT is now essential.
- Greater emphasis on market value and commercial terms, particularly where consideration is deferred over a long period of time.
- Longer clawback periods, increasing the time during which reliefs can be withdrawn if the qualifying conditions are breached.
Taken together, these changes increase both the tax cost and the risk for owners who approach an EOT purely as a tax-driven exit.
What does this mean for the future of EOTs?
EOTs are far from dead. But they are changing.
For business owners, the decision to transition to employee ownership now needs to be rooted in the non-tax benefits of the structure. Protecting the legacy of the business, rewarding employees, maintaining independence and planning for long-term sustainability are once again the primary drivers.
In practice, this means:
- EOTs work best where there is a genuine commitment to employee ownership.
- Early planning is more important than ever, particularly around valuation, funding and future governance/management structure.
- Professional advice is critical to ensure the structure remains compliant and commercially viable over time.
For many businesses, an EOT will still be the right solution. But it’s no longer a shortcut to a tax-free exit. It has to be done for the right reasons and set up properly to deliver lasting value.
How Gorvins can help
Employee ownership remains a complex and highly technical area of corporate law, particularly as the rules continue to evolve.
If you’re considering an EOT, or reviewing an existing structure in light of recent changes, early advice can make a significant difference to the outcome.
To get professional legal advice and support on this and matters like it, contact our corporate and commercial team today. Email us at enquiries@gorvins.com, call us on 0161 930 5151 or fill in the online form.