Employee Ownership Trusts: What You Need to Know

Tuesday, December 31, 2024

The UK Government reviewed EOTs in 2023. But no results yet. Here’s what you need to know while we wait.

The Key Benefits

  • Succession Made Easy
    No third-party buyer? No problem. Employees can “buy” the company without using their own money.
  • Tax Breaks Galore
    Sell your shares to an EOT? No capital gains tax. No inheritance tax.
  • Bonuses Without the Bite
    Employees can get tax-free bonuses up to £3,600. (Still pays National Insurance, though.)


EOT vs. EBT

Sounds similar, right? Not quite.

An EBT (Employee Benefit Trust) is broader. It holds shares for employees, sure, but it has lots of uses.

An EOT? It’s more focused. Tighter rules. Bigger tax advantages.


How It Works

Set up a trust.

Sell your shares to the trust (price checked by an independent valuer).

The trust owes you. It pays you back using future profits.

Simple? Sort of. But to get those juicy tax breaks, you’ve got to follow the rules:


The company must trade. No trading, no tax perks.

The trust needs to own more than half the company. Shares, voting rights, profits—you name it.

All employees must benefit equally. (Okay, slight tweaks allowed—things like pay, service length, and hours worked.)


Why Owners Love It

  • Tax Savings
    Up to 20% off what you’d pay in capital gains tax.
  • Flexible Exit
    Sell some shares. Keep some. Stay as a director if you want.
  • Inheritance Tax Relief
    Move the company into the trust? No inheritance tax. Ever.


Why Employees Love It

  • Skin in the Game
    They’re not just working for a company—they own it (indirectly).
  • Tax-Free Bonuses
    Up to £3,600 a year. No income tax.
  • Aligned Goals
    When employees win, the company wins. And vice versa.


The Catch

  • Delayed Payday
    Owners get paid over time, not upfront.
  • Performance Risk
    If the business falters, owners might not see the full sale price.
  • Lose the Tax Perks
    If the rules aren’t followed, those tax advantages vanish.


The Future of EOTs

More people are using EOTs. So, what’s next?

The Labour Party loves them. The Tories aren’t against them. Major changes? Unlikely.

But tweaks could happen:


  • No offshore trustees.
  • More employee representation.
  • Tax-free bonuses just for employees, not directors.


The offshore rule might shake things up the most. Why? Lots of trusts use offshore trustees to avoid UK capital gains tax if they sell the company later.


The Bottom Line

EOTs are a win-win. Owners get a way to step back. Employees get a slice of the pie.

But like anything in business, the devil’s in the detail.

© 2025 Stephen Bray. Patterns in life and business — told simply.