Learn about Employee Ownership Trusts

An employee ownership trust is a trust that owns shares in a company on behalf of its employees. The trust does not run the business day-to-day. Instead, it holds the shares for the long-term benefit of the workforce as a whole.

Employees do not usually buy shares individually, and ownership is not tied to seniority or individual investment. Instead, the trust structure is designed to give employees a collective, indirect ownership interest while allowing the company to continue to be managed by its directors.

From an owner's perspective, a sale to an EOT is a sale of shares, similar in principle to selling to a trade buyer or private equity.

The key difference is the identity of the buyer. Rather than another company or fund, the buyer is a trust established for the benefit of employees. The trust acquires a controlling interest in the business, usually at market value, following an independent valuation.

Once the sale completes, the company continues trading as before. Management typically remains in place, and the owner's involvement can be tailored to suit the circumstances — whether that means stepping back immediately or remaining involved for a period of time.

Like many business sales, an EOT transaction is funded over time rather than entirely upfront.

Funding commonly comes from a combination of:

• existing or future company profits
• third-party bank finance
• deferred consideration to the seller

The balance between these elements depends on the profitability of the business, its appetite for debt, and the objectives of the seller. With careful planning, it is often possible to achieve a meaningful upfront payment, with the remainder paid over time as the business continues to perform.

Because the purchase price is ultimately funded from the business itself, understanding affordability and cashflow is an important part of assessing whether an EOT is suitable.

Selling to an employee ownership trust is supported by a specific and deliberately generous tax regime.

Where the statutory conditions are met, a qualifying sale allows owners to withdraw value from their business at a capital gains tax rate of 12%, rather than being taxed as income. By comparison, extracting value through dividends can result in tax of up to 39.35%.

This makes employee ownership trusts the most financially generous and commercially flexible tax relief currently available to UK business owners. The regime is designed to encourage long-term employee ownership while still allowing owners to realise value from their business in a structured and predictable way.

Tax is an important consideration, but it is not the only one. Because the sale is funded from the future performance of the business, structure, affordability and incentives play a significant role in determining outcomes.