Succession and exit planning can be one of the most challenging stages for business owners. Many face the dilemma of how to transfer ownership while protecting the company’s future and rewarding the team that helped build it.
Employee ownership trusts are increasingly recognised as an effective solution for business stability. They provide a structured way for owners to exit, while keeping employees invested in the long-term success of the business.
Employee ownership trusts can boostemployee engagement, foster long-term employee stability, and promote shared prosperity within a business.
In this blog, we are going to focus on Employee Ownership Trusts (EOTs), a specific model that offers a practical and tax-efficient approach to succession and exit planning for business owners.
What is an Employee Ownership Trust?
An Employee Ownership Trust (EOT) is a legal structure where a trust holds a controlling stake in a business on behalf of its employees.
Unlike direct share ownership, employees do not hold individual shares but still participate in the company’s success through profit-sharing and involvement in governance.
EOTs are often used for succession planning and exit strategies, providing a way for owners to transfer control while maintaining the company’s culture and continuity.
The key benefits of Employee Ownership Trusts
One of the main advantages of an Employee Ownership Trust (EOT) is its tax efficiency. When a business is sold to an EOT, the sale can qualify for capital gains tax (CGT) relief, meaning the owner may not have to pay CGT on the sale of shares to the trust.
This can result in substantial financial savings and makes transferring ownership to employees more attractive. Careful planning can also help manage other tax obligations, ensuring you retain maximum value from the transaction.
Beyond tax considerations, EOTs also provide:
- Smooth succession planning: Ownership can be transferred gradually without disrupting operations, ensuring continuity and long-term stability.
- Business stability and governance: With the trust holding a controlling stake, the company remains aligned with its long-term goals and protected from external buyers.
- Flexible exit strategy: EOTs can be structured to suit personal and financial objectives, including repayment schedules or bonus arrangements.
- Clear legal framework: The trust defines roles and responsibilities, helping avoid disputes and ensuring compliance with governance and reporting requirements.
These combined benefits make EOTs a practical, well-structured solution for succession and exit planning, providing both financial and operational security.
Key qualifying conditions for an EOT sale
To complete a qualifying sale to an Employee Ownership Trust (EOT), the business must meet certain conditions:
- Trading company: The company must be a trading business, or the main company in a trading group.
- Benefit for all employees: The trust must hold the shares for the benefit of all eligible employees, generally on the same terms.
- Trustees and ownership rules:
- Most trustees (and connected persons) must not be former shareholders who would have significant ownership or control.
- The company must not be controlled by such former shareholders.
- If a corporate trustee is used, most of its directors must also meet these rules.
- Trustee control and residency: Trustees must live in the UK and maintain at least a 51% controlling interest in the company.
- Employee/shareholder balance: The number of employees who are also significant shareholders (or connected to them) should not exceed 40% of the total workforce.
- Fair application of trust property: The trust should benefit all employees fairly, though differences can be made based on salary, length of service, or hours worked.
How Edwards Accountants assist with Employee Ownership Trusts
At Edwards Accountants, we can advise and guide business owners through all types of ownership options, helping identify the approach that best suits you and your business.
In particular, we support the establishment of Employee Ownership Trusts (EOTs), assisting with trust structure and implementation, tax planning and financial modelling, and communicating the changes to employees.
With our support, you can achieve a smooth, financially secure, and well-governed transition, giving you confidence that your business remains in trusted hands.
Contact Edwards Chartered Accountants today to find out how we can help.