What is Employee Ownership Trust (EOT)?

Explanation of an EOT

An EOT is a specific form of employee ownership introduced in the UK under the Finance Act 2014. It allows shareholders to sell a controlling interest in a trading company to a trust established for the long-term benefit of employees.

The structure is designed to support succession planning, particularly for owner-managed and family businesses. Instead of selling to a third party or management team, the owners sell shares to the EOT. The trust then holds those shares collectively for all eligible employees.

In the UK, where statutory conditions are met, disposals to an EOT may qualify for Capital Gains Tax (CGT) relief. The company must meet certain requirements relating to trading status, employee participation and ongoing control. The EOT model is commonly used as an alternative exit route that promotes employee engagement and long-term stewardship.

Key characteristics of an EOT

Key characteristics of EOTs include the following:

• The trust must acquire a controlling interest, meaning more than 50% of the company’s ordinary share capital, voting rights and entitlement to profits.
• The trust is established for the benefit of all eligible employees on broadly equal terms.
• The company must be a trading company or the principal company of a trading group.
• Former owners may receive consideration for their shares, often funded over time from company profits.
• The structure is governed by specific UK tax legislation introduced in 2014.

How does an EOT work?

1. A trust is created to act for the long-term benefit of the company’s employees.
2. The existing shareholders sell a controlling interest in the company to the trust.
3. The trust funds the purchase, commonly through deferred consideration funded by company profits.
4. The trust holds the shares collectively, and the company continues trading with employees as indirect beneficiaries.

Example of an EOT in practice

A UK owner-managed consultancy firm seeks succession without an external sale. The founder sells 100% of the shares to an EOT. The purchase price is paid over several years from the company’s future profits. Employees do not purchase shares directly but become beneficiaries of the trust, which holds the company on their behalf.

EOT Frequently asked questions

Is an EOT the same as direct employee share ownership?

No. Under an EOT, shares are held collectively by a trust for the benefit of employees. Individual employees do not usually hold shares directly, although separate share schemes may exist alongside an EOT.

Does an EOT remove the need for management?

No. Day-to-day management remains with the company’s directors and leadership team. The trust acts as shareholder on behalf of employees but does not replace the company’s governance structure.

Can bonuses be paid under an EOT?

Yes. Subject to meeting legislative conditions, qualifying EOT-owned companies may pay income tax-free bonuses to employees up to a statutory annual limit, as set out in UK tax legislation.

Is an EOT only suitable for large companies?

No. EOTs are commonly used by small and medium-sized owner-managed businesses as part of succession planning, although larger companies may also adopt the structure.