Employee Ownership Trusts – What Are They & How Do They Operate?

What is an Employee Ownership Trust (EOT)?

An Employee Ownership Trust (EOT) is a legal structure known as a Trust set up to promote employee ownership of a company. It enables the existing shareholders to sell their shareholding to the Trust.

The employees become beneficiaries of the Trust, which has been set up for their benefit and the Trust holds a significant stake in the company. An EOT is structured to provide long-term benefits to the employees and promote employee engagement, productivity, and loyalty.

How does an Employee Ownership Trust operate and what are the main benefits?

The EOT enables the shareholders of a company, usually the founders, to sell their shares to the Trust. The Trust then holds the shares on behalf of the employees, ensuring that the ownership remains with the workforce.

The Trust’s primary purpose is to act in the best interests of the employees, and it holds and manages the shares for their benefit.


  • By providing employees with a direct stake in the organisation, an EOT aims to foster a sense of ownership, pride, and commitment among workers. It can enhance employee motivation, loyalty, and productivity, as they have a direct financial interest in the success of the company.
  • An EOT can be an effective tool for succession planning, particularly for business owners looking to retire or exit their company. It provides a mechanism for transferring ownership while preserving the organisation’s ethos and culture.
  • The Trust usually has a board of trustees responsible for overseeing the organisation’s affairs and acting in the interests of the beneficiaries. This board may include employee representatives, ensuring that employees have a voice in the decision-making process.
  • As an organisation grows and becomes more successful, the Trust’s ownership stake can increase in value. Consequently, employees can benefit from any financial rewards, such as dividends or a share of the profits, allocated by the Trust.

The sellers would also have the benefit of a less stressful sale process than they would have if they were selling their business to a third party or to existing management.

Tax and Employee Ownership Trusts

In the UK, there may be tax advantages associated with the implementation of an EOT, including relief from Capital Gains Tax (CGT). Examples of how this works in relation to an EOT are:

  • Sale of shares – when existing owners or shareholders of a company sell their shares to an EOT, the capital gain arising from the sale may qualify for CGT relief.
  • Eligibility criteria – there are specific requirements that have to be met to be eligible for the CGT. This includes being an employee-owned organisation and having a controlling interest in the company held by the EOT.
  • CGT exemption – if the conditions are met, the capital gain from the sale of the shares to the EOT can be exempt from CGT, resulting in substantial tax savings.
  • Tax-free bonus payments to employees – An EOT-controlled company can pay bonuses of up to £3,600 per employee per year as an income tax and CGT-free profit share.
  • Lifetime limit – there is a lifetime limit on the amount of gains that can be exempted from CGT. However, it’s important to consult the latest tax regulations or seek professional advice.
  • Ongoing CGT relief – any increase in the value of the shares held by the EOT after the initial sale can also be exempt from CGT. This ongoing relief can provide further tax advantages if the value of the organisation grows over time.

Get advice!

It’s important to note that the specifics of an EOT can vary depending on the jurisdiction and legal framework in which it operates and that CGT relief for EOTs in the UK is subject to specific requirements and conditions.

It is advisable to consult with legal and financial professionals to understand the relevant laws and regulations applicable to your specific situation.

How can we help?Employee Ownership Trusts

Ziaur Rahman is a Legal Director in our Corporate services team.

For further information or advice on Employee Ownership Trusts or any related topics, please call Ziaur or another member of the team in Derby, Leicester or Nottingham on 0800 024 1976 or via our online enquiry form.

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