Employee ownership trusts: structuring options, tax costs and control trade-offs for founders

Employee Ownership Trusts have been part of the UK’s succession toolkit since the Finance Act 2014, and for the first decade of the regime they were pitched – accurately – on the strength of a single number: 0% Capital Gains Tax on a qualifying sale.

That number changed at the Autumn Budget 2025, and the change has prompted a wave of founders and their advisers to ask a more considered question than they did a year ago: not just “should we consider an EOT”, but “which version of an EOT structure actually fits this business, and what will it cost us to get there?”.

That question matters particularly for the family-owned and owner-managed businesses we work with across a range of sectors in the North West, where founders are often weighing an EOT against a trade sale or a management buyout, and where “handing over control” is rarely a simple binary decision. This article sets out the main structuring options – including the more unconventional routes some families use to retain a degree of influence – alongside the current tax position, the real costs involved, and where specialist advice earns its keep.

Getting an EOT transaction right tends to need two disciplines working in parallel rather than one adviser wearing both hats. Our tax team advises on relief eligibility, structuring and HMRC clearance, while our Transaction Services team – led by Transaction Services Director Paul Bennett – handles the financial due diligence, independent valuation support and funding modelling that sit underneath the deal. Across our EOT work, we advise on both sides of the transaction – supporting selling shareholders looking to structure an exit efficiently, and separately, supporting trustees who take on an ongoing legal duty to act in employees’ interests once the deal completes. As with any transaction, we act for one party at a time and put the appropriate safeguards in place to manage conflicts where, for example, we have an existing relationship with the other side of a deal.

What is an Employee Ownership Trust, and what it actually requires

An Employee Ownership Trust is a trust that acquires a controlling interest – more than 50% of a company’s shares – and holds them on behalf of all employees. Under HMRC’s own guidance on the controlling interest requirement, the trust must not hold a controlling interest immediately before the tax year in which the disposal occurs, but must acquire and then maintain it for the remainder of that tax year for relief to apply. This single condition shapes almost every structuring decision that follows, including how much genuine control a family can retain if they still want to qualify for relief.

There is no flexibility on this point. The controlling interest requirement is tested across four separate measures at once – voting rights, ordinary share capital, profits available for distribution, and assets on a winding up – and the trust needs to clear more than 50% on all four, not just one. A structure that gives the trust 51% of the votes but a different share of distributable profits can fail the test even though it looks like a controlling stake on paper. Fall below the threshold on any of the four at any point after first qualifying and before the tax year ends, and the relief is lost for that disposal. In practice this means a trust holding, say, 40% of a company is not an EOT for tax purposes at all – it is simply an employee benefit trust with a minority stake, and none of the EOT-specific reliefs are available to it.

The Employee Ownership Association’s own Employee Owned Business Register put the total number of UK employee-owned businesses at around 2,824 as of March 2026, with roughly 547,971 employee owners between them – a scale that has made the EOT the dominant model for employee ownership in this country, according to the House of Commons Library.

Structuring option one: the conventional majority-owned EOT

The default, and still by far the most common, structure is a straightforward one. The founder (or founding shareholders) sells 51% or more of the company – often the full 100% – to the trustees of a newly established EOT, typically funded over several years out of the company’s future profits rather than by external buyers. Control passes to an independent trustee board, which is legally required to act in the interests of all employees rather than the outgoing owners.

This is the structure that qualifies most cleanly for the full suite of EOT tax reliefs, and it remains attractive for founders who are ready for a genuine handover: no ongoing involvement in strategic decisions, no minority-shareholder complications, and the cleanest possible position with HMRC.

Structuring option two: hybrid ownership

A growing number of businesses are using a hybrid model, where the EOT retains legal control – still more than 50% of the shares – but the remaining minority is held directly by employees rather than sitting entirely within the trust. This addresses a common criticism of the pure EOT model: a trust-only interest does not always link an individual’s performance closely enough to their reward, and no single employee benefits directly if the business is later sold on. Direct shares can be combined with growth share or option arrangements to sharpen incentives for key people, while the EOT continues to hold the controlling stake the tax reliefs require. In our experience advising family and owner-managed businesses, this structure tends to suit companies with a small number of senior managers the founder is particularly keen to retain and motivate through the transition.

Structuring option three: retaining family influence without retaining control

This is the structure that generates the most questions from family businesses. It is not possible to obtain EOT tax relief while a family retains legal control of the company – the trust must hold more than 50% of the shares, full stop. What families can do, within that constraint, is retain meaningful influence in other ways:

• Minority shareholding: a founder can sell 51-70% to the EOT and retain the balance personally. A retained minority stake in an EOT-controlled company tends to be worth considerably less than its pro-rata percentage would suggest, since the trust controls the company and a minority holding is hard to sell on to anyone else. There is also a tax trap worth flagging: HMRC’s rules on the controlling interest requirement mean relief generally applies to disposals made in the tax year the EOT first gains control, so a founder planning to sell a further tranche later should check the position carefully with an adviser before assuming it will also qualify.
  
• Reserved matters and board representation: family members can remain as executive directors, or negotiate reserved matters in the trust deed and articles requiring their consent on specified decisions (capital expenditure thresholds, senior appointments, disposals of key assets), even though the trust holds the majority economic and voting interest.
  
• Staggered or phased transitions: rather than a single disposal, some founders sell a first tranche to establish EOT control, remain closely involved operationally, and plan an orderly handover of day-to-day leadership over several years.
  
• External investor alongside the EOT: in principle, a minority of shares can be held by outside investors rather than employees or family, though this is less common and needs careful structuring to avoid undermining the EOT’s qualifying status.

None of these routes lets a family keep legal control and full tax relief simultaneously. What they do offer is a way to soften what can otherwise feel like an abrupt handover – useful for a family that wants to keep a voice in the business without pretending the underlying ownership hasn’t changed.

The current tax position for EOTs

The headline change is the one most founders have already heard about. From 26 November 2025, statutory Capital Gains Tax relief on a qualifying disposal to an EOT was cut from 100% to 50%, following the Autumn Budget 2025. For a higher-rate taxpayer, that produces an effective CGT rate of around 12% on the full gain – the chargeable 50% taxed at the standard 24% rate – rather than the 0% many founders had planned around. On a £1 million gain, that is a real tax bill of roughly £120,000 where previously there would have been none.

A few further points matter for anyone modelling the numbers:

• The non-exempt portion of the gain is not simply lost to the current year’s tax bill in every case – the remaining gain can be held over and deducted from the trustees’ base cost, effectively deferring it until the EOT itself eventually sells the company.
  
• Business Asset Disposal Relief and Investors’ Relief are no longer available on a disposal where EOT relief is claimed, which changes the comparison against a conventional sale for some founders.
  
• HMRC now treats certain company contributions to an EOT as distributions rather than capital, following a change of approach from 30 October 2024 – a detail that affects how the trust is funded and should be checked with your adviser before a transaction structure is finalised.
  
• The employee side of the tax position is unchanged: EOT-owned companies can still pay staff up to £3,600 a year each in income-tax-free bonuses, though National Insurance still applies.

The government’s own reasoning, is that the relief’s cost had grown well beyond what was originally forecast – reportedly reaching around £2 billion a year, some twenty times the original 2013 costing – as EOTs became more popular, and that a review was overdue as the regime approached its tenth anniversary. Not everyone has welcomed the timing: some commentary since the Budget has questioned whether removing the incentive now was short-sighted, given the model’s broader record on productivity, wellbeing and business continuity.

What it actually costs to set an EOT up

Beyond the tax bill on the gain itself, an EOT transaction carries transaction and running costs that should be factored in at the outset:

• Independent business valuation, since the EOT can only pay full market value and HMRC will expect this to be robustly evidenced
  
• Legal fees to draft the trust deed, articles of association and share purchase agreement, and to establish the trustee board
  
• Tax advisory fees, including any HMRC clearance application to confirm the transaction qualifies for relief before it completes
  
• Ongoing trustee governance costs – independent trustees, trust administration, and the compliance work needed to demonstrate the trust continues to act for the benefit of all employees, an area HMRC has been paying closer attention to following recent regime tightening
  
• The funding risk on deferred consideration – since the purchase price is typically paid to the seller from future company profits over several years, the seller’s total return depends on the business continuing to perform, and the company needs headroom to keep meeting those payments alongside normal trading needs

None of these costs are unique to EOTs – a trade sale or MBO carries its own fees and risks – but they are worth budgeting for realistically rather than focusing purely on the CGT saving, particularly now that saving is smaller than it was.

How UHY Williamson Croft help, from both sides of the table

An EOT transaction touches tax and transaction services at almost every stage, and the two disciplines are answering different questions.

For the selling shareholders, our tax team works through which structure – a conventional majority sale, a hybrid model, or one of the family-influence routes set out above – actually delivers what the founders want, then manages the HMRC clearance process to confirm the transaction qualifies for relief before it completes. Alongside that, our Transaction Services team builds the financial model underpinning the deal: sustainable earnings and cash generation analysis to support the price being paid, and – critically, given how most EOT purchases are funded – modelling of the deferred consideration schedule against the company’s forecast profits, so sellers go in with a realistic view of when and how they’ll actually be paid.

For trustees, the obligations are different but no less exacting. Trustees have to be able to demonstrate they took reasonable steps to ensure the price paid does not exceed market value, which in practice means commissioning or reviewing an independent valuation robust enough to withstand HMRC scrutiny. Our Transaction Services team supports trustees with that valuation work and with ongoing financial due diligence as the business trades on under the trust, while our tax team advises trustees on the governance and compliance obligations that come with running an EOT – including the funding and distributions issues referenced above, an area where HMRC’s approach has tightened in recent years.

Because we can bring both perspectives to the same transaction, we’re able to flag where a tax-efficient structure might create funding pressure further down the line, or where a valuation assumption needs to be stress-tested against what the deferred consideration schedule can realistically support – rather than each workstream being figured out in isolation.

Getting the structure right from the outset

The reduction in relief has not removed the case for EOTs, but it has made the choice of structure – and the quality of early advice – more consequential than it was when the tax outcome alone did most of the persuading. Whether that means a conventional full transfer, a hybrid model to sharpen incentives for key staff, or a phased approach that lets a family step back gradually, the right answer depends on the specific business, its funding capacity, and what the founders actually want their legacy to look like.

Alternatives to an EOT: giving employees a smaller stake directly

An EOT is built for a specific purpose – a controlling, collective, trust-held stake, usually as part of a succession or exit. It is the wrong tool if what a business actually wants is for employees to hold a modest number of shares personally. For that, there are four established UK schemes, set out by the government’s own call for evidence on tax-advantaged share schemes, each suited to a different goal:

• Share Incentive Plan (SIP): the closest match to “everyone gets a small amount of shares.” A UK-resident trust acquires shares for staff, who receive them as free shares, buy them from pre-tax salary as partnership shares, or receive an employer top-up as matching shares. Shares held in the plan trust for five years are entirely free of income tax and National Insurance on the gain.
  
• Save As You Earn (SAYE), also known as Sharesave: employees save a fixed monthly amount over three or five years, then have the option, not the obligation, to buy shares at a price fixed at the outset. There is no downside risk to the employee, since savings can simply be taken back if the share price has fallen.
  
• Enterprise Management Incentives (EMI): the UK’s most widely used scheme, but discretionary rather than all-employee – the company chooses who receives options, up to £250,000 of shares per person and £3 million in total. It is restricted to smaller companies (broadly, gross assets under £30 million and fewer than 250 employees) and excludes certain sectors.
  
• Company Share Option Plan (CSOP): similar in structure to EMI but open to a wider range of companies, including larger ones that don’t qualify for EMI. The individual limit is lower, at £60,000, and there is a three-year minimum holding period before options can normally be exercised.

The distinction from an EOT is straightforward: these four schemes give employees a direct, personal, individual stake with real upside, whereas an EOT is an indirect, collective structure where the trust holds the shares and no individual employee owns anything personally. Where the objective is broad, modest participation across the workforce, SIP and SAYE are usually the starting point; where the goal is targeting a smaller group of key people, EMI or CSOP tend to fit better. None of these is a substitute for an EOT in a succession context, but they are frequently used alongside one – for example, as the direct-shareholding element of the hybrid structure discussed above.

Frequently asked questions about EOTs

Whether you’re a founder weighing up an EOT against other exit or succession routes, or a trustee looking for support with valuation and ongoing compliance, our tax and Transaction Services teams can talk through what a qualifying structure would look like and what it’s likely to cost. Get in touch to arrange a conversation.

This article reflects the law and HMRC guidance in place at the time of writing and is provided for general information purposes only. It does not constitute tax, legal, financial or other professional advice, and should not be relied upon as a substitute for advice tailored to your specific circumstances. Employee Ownership Trust legislation, HMRC practice and related tax reliefs are complex and subject to change, and the appropriate structure, tax treatment and costs will depend on the individual facts of each business and transaction. Williamson & Croft accepts no liability for any loss arising from reliance on this article. Please contact us directly before taking any action.