An employee ownership trust, or EOT, is one of the most talked-about ways to exit a UK business. The pitch has always been simple and attractive: sell a controlling stake in your company to a trust that holds it for your staff, keep the business independent, reward the people who built it, and pay no Capital Gains Tax on the sale. For a decade that last point, the 0% CGT, was the headline that pulled owners in.
That headline is now out of date. At the Autumn Budget on 26 November 2025, the government cut the CGT relief on a sale to an EOT from 100% to 50%, with immediate effect. Guides that still describe an EOT sale as entirely tax-free were written before that change and are now wrong. The structure is still a serious and often excellent exit route, but the numbers have moved, and any decision made on the old figures needs revisiting.
This is the definitive UK guide to employee ownership trusts for 2026/27, rebuilt for the post-26 November 2025 world. It covers what an EOT is, how it works, who it suits, the qualifying conditions, the tax-free employee bonus, the real costs, and the question every owner is now asking: is an EOT still worth it after the cut? It is written for owner-directors weighing a genuine exit, not as a consumer explainer.
What an employee ownership trust actually is
An employee ownership trust is a special type of trust, defined by the Finance Act 2014, that holds a controlling interest in a company for the benefit of all its employees. The best-known example of employee ownership in the UK is the John Lewis Partnership, which is held in trust for its staff. The EOT regime was designed to make that model accessible to ordinary private companies.
The key thing to understand is that employees do not personally buy or own shares in an EOT. There are no individual share certificates, no cash out of employees' pockets, and nothing for them to sell later. Instead, a trust becomes the majority shareholder, and it holds those shares collectively for the whole workforce. Employees benefit through the trust: through the way the business is run in their interest, through job security, and in most cases through an annual bonus that can be paid free of income tax.
For the departing owner, the EOT is the buyer. Rather than selling to a competitor, a private equity house or an individual, you sell your controlling stake to the trust. That is what makes the route distinctive. There is no external acquirer poring over your books, no trade rival learning your secrets during due diligence, and no risk of the business being stripped, merged or relocated after you leave. The company continues, independent, owned in substance by the people who work in it.
How an EOT works, step by step
Mechanically, an EOT transaction has a few moving parts, but the logic is straightforward once you see the shape of it.
First, a trust and a trustee company are established. The trustee company, whose directors typically include an independent trustee alongside employee and sometimes former-owner representatives, acts as the legal owner of the shares and is bound to act in the employees' interest under the trust deed.
Second, the company is independently valued, because the trust must pay a fair market price. This is not a place to be aggressive: HMRC expects the price the trust pays to reflect genuine market value, and an inflated valuation can jeopardise the tax treatment. For how UK businesses are valued and what drives the multiple, see our business valuation guide.
Third, the owner sells a controlling interest, more than 50%, to the trust. The trust rarely has that money sitting in a bank account. So the purchase is almost always funded from the company's future profits. The company makes contributions to the trust over a period of years, and the trust uses that money to pay the former owner in instalments. In practice, much of the consideration is deferred and sits as a loan owed by the trust to the seller. Some deals bolt on third-party bank funding to pay the seller a larger sum upfront, but the underlying engine is the business buying itself out of its own earnings.
This funding structure is the single most important commercial feature of an EOT, and it cuts both ways. It means you do not need to find an external buyer with cash. It also means you, the seller, carry real risk: a large part of your sale price arrives over time and depends on the company continuing to trade profitably after you have gone. If profits fall, your deferred payments slow down.
The 26 November 2025 change: 50% CGT, not 0%
Here is the change that reshaped the entire case for an EOT. At the Autumn Budget on 26 November 2025, the Capital Gains Tax relief on a disposal of a controlling interest to an EOT was cut from 100% to 50%, with immediate effect for disposals on or after that date.
Under the old rule, a qualifying sale to an EOT attracted full relief: the seller paid no CGT at all. Under the new rule, half of the gain on the sale to the trustees is the seller's chargeable gain at the time of sale. The other 50% is not chargeable at sale but is effectively held over and bites on any future disposal of the shares by the trustees. Crucially, Business Asset Disposal Relief and Investors' Relief cannot be claimed on the taxable 50%, so it is taxed at the ordinary CGT rate for shares: 24% for higher and additional-rate sellers, or 18% within any unused basic-rate band, after the £3,000 annual exempt amount.
HMRC's stated reason for the cut was cost. The relief had grown to roughly £2bn a year, around 20 times its original 2013 costing, and the government judged that too generous. Whatever the rationale, the practical effect for owners is stark, and it is best shown with numbers. The deep mechanics, including why BADR cannot rescue the taxable half and how the held-over gain works, are covered in full in our companion page on EOT tax relief and CGT.
Guides that still say a sale to an EOT is entirely CGT-free were written before 26 November 2025 and are now wrong. This is worth stating plainly, because a great deal of EOT content online has not been updated and continues to sell the 0% headline. If you are reading advice that does not mention the 50% cut, treat it as out of date.
Worked example: a £4m sale, old rule versus new
Take an owner selling 100% of a trading company to an EOT. The figures below are the consistent worked example we use across all our EOT pages.
| Item | Figure |
|---|---|
| Sale value (market value to EOT) | £4,000,000 |
| Original base cost | £200,000 |
| Total gain | £3,800,000 |
| Old rule (pre-26 Nov 2025): 100% relieved | £0 CGT at sale |
| New rule (on/after 26 Nov 2025): chargeable now = 50% × £3,800,000 | £1,900,000 |
| Less annual exempt amount | £3,000 |
| Taxable now | £1,897,000 |
| CGT rate (BADR and Investors' Relief not available on this slice) | 24% |
| CGT payable now | £455,280 |
| Remaining 50% (£1,900,000) | Not taxed at sale; latent gain that bites the trustees on a future disposal of the shares |
The message is hard to miss. Before 26 November 2025 this exit was tax-free. The same sale today triggers roughly £455,000 of CGT, and leaves a further £1.9m of latent gain inside the trust that can crystallise if the trustees ever sell the shares. That is not a reason to abandon the EOT idea, but it is a reason to model your own numbers properly rather than relying on the old assumption.
Who an EOT suits, and who it does not
An EOT is a good fit for some owners and a poor fit for others. The old tax break used to paper over that distinction; the 50% cut has exposed it. Ask yourself which side of these lines you sit on.
An EOT tends to suit you if you care about the business continuing independently, you want to reward and retain the staff who built it, you are willing to be paid over time rather than in one lump, and the company generates enough surplus profit to fund the buyout from its own earnings within a reasonable period. It also suits owners who dislike the idea of a trade rival or private equity buyer combing through their business, and those who want a phased, dignified exit where they can stay involved for a while.
An EOT is the wrong route if you need a clean, full-price cash exit on completion, if the business cannot reliably produce surplus profit to fund the deferred consideration, or if there is no management team capable of running the company without you. It is also weaker now for owners whose primary motivation was the 0% tax, because that motivation no longer exists in the same form. If the business has a strong trade buyer willing to pay full value in cash, that route deserves a proper comparison, especially now BADR at 18% applies to a trade sale but not to the taxable half of an EOT gain.
Qualifying conditions you have to meet
The EOT tax treatment, even at 50% relief, only applies if the transaction meets a set of statutory conditions. Getting these wrong can lose the relief entirely, so they matter.
- Trading company or group. The company must be a trading company, or the principal company of a trading group. Investment companies do not qualify.
- Controlling interest. The trust must acquire and then keep a controlling interest, meaning more than 50% of the ordinary share capital, the voting rights, and the rights to profits and to assets on a winding up. A minority stake does not qualify.
- All-employee benefit. The trust must benefit all eligible employees, and broadly on the same terms. It can vary benefit only by reference to permitted factors such as length of service, hours worked and level of remuneration. It cannot cherry-pick a favoured few.
- The participators rule. There is a limit on the proportion of the workforce made up of people who were, broadly, 5% or greater participators (owners) and their connected persons. This stops a small group of former owners dominating the very structure designed to benefit staff.
- Trustee residence and independence. Recent rules tightened the requirements on where the trustees are resident and how independent the trustee board must be, closing down arrangements that kept too much control with the seller.
These conditions must generally be met not just at the point of sale but on an ongoing basis. If a disqualifying event happens after completion, the relief can be clawed back. The practical build, including trustee structure and the process end to end, is covered in our guide on how to set up an EOT.
The tax-free bonus for employees
One benefit that survived the Budget untouched is the employee bonus. A company that is controlled by a qualifying EOT can pay each eligible employee an annual bonus of up to £3,600 free of income tax.
Two points of realism. First, the exemption is from income tax only. National Insurance still applies to the bonus, for both the employee and the employer, so describing it as entirely tax-free overstates it. Second, the bonus must generally be available to all employees, and on the same terms, subject to the same permitted variations (service, hours, pay) that apply to the trust benefit itself. You cannot use it to reward a select group.
Even with those caveats, the bonus is a genuine and recurring benefit. Paid consistently, it becomes part of the retention and engagement case for employee ownership, and it is one of the ways the model gives something tangible back to the workforce every year rather than only at some distant point.
Advantages and disadvantages, weighed honestly
With the tax position changed, the case for an EOT rests more heavily than before on its non-tax merits. Here is a balanced view. For a fuller treatment of the trade-offs, see our dedicated page on EOT pros and cons.
Advantages
- A ready buyer. You do not need to find an external acquirer, run a competitive sale process, or expose your business to rivals during due diligence.
- Independence and continuity. The company stays independent, keeps its name and culture, and is not merged, stripped or relocated by a new owner.
- Staff retention and engagement. Employee ownership, backed by the annual tax-free bonus, can support retention and motivation in a way an external sale never does.
- A phased exit. You can step back gradually, often staying on as a director for a period while the business funds your consideration and new leadership settles in.
- 50% CGT relief. Even after the cut, half the gain still benefits from relief, which is more generous than a fully taxable disposal.
Disadvantages
- You are usually not paid in full upfront. Much of the price is deferred and funded from future profits, so you carry the risk that the business continues to perform.
- The 50% CGT charge. The old 0% headline is gone. Half your gain is now taxable at sale, without BADR or Investors' Relief, and a further 50% is held over against the trustees.
- Complexity and cost. The structure is more involved than a simple share sale, with valuation, trust deeds, trustee governance and ongoing administration.
- Cash-flow pressure on the company. Money used to pay the former owner is money not spent on investment, pay or growth, at least until the debt is cleared.
- Governance change. The trustees have duties to employees, and decision-making is no longer yours alone.
EOT versus trade sale versus MBO
An EOT is one of several exit routes, and the right choice depends on your priorities: price, speed, control, and what happens to the business afterwards. The three routes owners most often compare are a trade sale, an EOT, and a management buyout.
| Feature | Trade sale | EOT | Management buyout (MBO) |
|---|---|---|---|
| Who buys | External company or investor | A trust holding for all staff | Your existing management team |
| How it is funded | Buyer's cash and/or finance | Company's future profits | Management funds plus finance/vendor loan |
| Seller's tax on gain | BADR at 18% on first £1m, then 24% | 50% chargeable, no BADR on that slice; 50% held over | Usually BADR at 18% on first £1m, then 24% |
| Paid upfront? | Often largely upfront | Usually phased over years | Often part upfront, part deferred |
| Business continuity | Uncertain; may be merged or changed | Independent, retained | Continues under management |
| Confidentiality | Rival sees your books in diligence | No external buyer | Internal only |
The tax comparison has shifted. When an EOT gave 0% CGT, it usually beat a trade sale on tax by a wide margin. Now that half the EOT gain is taxable without BADR, a trade sale that qualifies for BADR at 18% on the first £1,000,000 can look more competitive on tax than it used to, though the EOT still shelters half the gain. This is exactly why the routes need modelling side by side on your own figures rather than on a rule of thumb.
A management buyout sits between the two: your existing team buys the company, typically part-funded upfront and part-deferred. It keeps the business in familiar hands but relies on the management team being able to fund the deal. For how an MBO is structured, see our management buyout guide. To work through the full journey and choose between all the routes, see our pillar guide on selling your business.
How to set one up, and how long it takes
An EOT is not an overnight transaction, but nor is it a multi-year project. A typical deal completes in three to six months, and moves through recognisable stages.
| Stage | What happens | Rough timing |
|---|---|---|
| 1. Scoping and valuation | Confirm the company qualifies, agree an independent market valuation, model the seller's tax position | Month 0 to 1 |
| 2. Structure and funding | Design the trust, decide the trustee board, agree how the consideration is funded from profits and over what period | Month 1 to 2 |
| 3. Documentation | Draft the trust deed, trustee company, share purchase agreement and any funding documents; consider HMRC clearance | Month 2 to 4 |
| 4. Completion | Trust acquires the controlling interest; seller begins receiving consideration; bonus scheme set up | Month 4 to 6 |
| 5. Ongoing | Trustees run the trust, company funds the deferred consideration, annual bonus paid, conditions maintained | After completion |
The pace depends heavily on how ready your accounts are and how quickly a valuation can be agreed. Businesses with clean, current financials and a management team already stepping up tend to move through the process faster. Our step-by-step build guide covers the detail: see how to set up an EOT.
Cost and ongoing trustee duties
An EOT carries two kinds of cost: the one-off cost of doing the deal, and the ongoing cost of running the structure afterwards.
Set-up costs for a straightforward EOT typically run from around £15,000 to £50,000 or more in professional fees, covering the valuation, legal drafting, tax advice and trustee structuring. Larger or more complex businesses cost more. This is a genuine outlay, and it should be weighed against the equivalent costs of running a competitive trade sale process, which are often higher.
On an ongoing basis, the trust needs administering, the trustee company must file its own accounts and meet its duties, and the annual bonus scheme needs running through payroll. The trustees hold real legal responsibilities: they must act in the interests of the beneficiaries (the employees), oversee the company's performance at a governance level, and ensure the qualifying conditions continue to be met so the relief is not clawed back. These duties are not onerous for a well-run business, but they are not nothing, and they are a permanent feature of the structure rather than a one-off.
Is an EOT still worth it after the cut?
This is the question the 26 November 2025 change forces every owner to ask, and the honest answer is: it depends on why you were considering an EOT in the first place.
If your interest was primarily the 0% tax, that reason has gone. Half your gain is now chargeable, without BADR, and a trade sale with BADR at 18% may compete more closely than it once did. On tax alone, the EOT no longer wins automatically.
But if you value what an EOT does beyond tax, the case is still strong. A ready buyer with no competitive sale process. Independence and continuity for the business you built. Genuine reward and retention for your staff. A phased exit you can control. For a great many owners, those things were always the real reason, and the tax relief was a welcome bonus rather than the whole point. For them, an EOT at 50% relief, on a business that can fund the buyout from profit, remains an excellent route.
The right way to decide is not on a headline, old or new, but on your own modelled numbers, comparing the EOT against a trade sale and any other route, on tax and on everything else. Because BADR planning and CGT modelling on exit are core accountant work, this is exactly where having the figures run before you sign heads of terms pays for itself. For the general CGT and BADR mechanics that sit behind these numbers, see our selling your business CGT and BADR guide, our fundamentals on Business Asset Disposal Relief, and the detail of the rate change in our post on the BADR 2026 rate change.
Where to read next and primary sources
This guide is the hub for our EOT content. Go deeper on the tax in our page on EOT tax relief and CGT, weigh the trade-offs in EOT pros and cons, and follow the build in how to set up an EOT.
The legal and factual position in this guide draws on primary sources. The Capital Gains Tax relief on disposals to EOTs is set out in the HMRC Capital Gains Manual at CG67800 onwards, and in the legislation at Taxation of Chargeable Gains Act 1992, sections 236H to 236U, as inserted by Finance Act 2014, Schedule 37. The cut from 100% to 50% relief was announced at the Autumn Budget 2025. For background and parliamentary analysis, the House of Commons Library briefing on employee ownership trusts (CBP-10437) is a useful overview, and the Employee Ownership Association publishes adoption data. General Business Asset Disposal Relief guidance is on gov.uk.
This guide gives general information, not advice on your specific circumstances, and it is not a personal tax recommendation. Advising on and arranging the sale of a company by way of its shares is exempt under Article 70 of the Regulated Activities Order; we do not arrange the finance that funds any buyout. For your own numbers, and to have the CGT modelled before you sign anything, get in touch.