If you’ve been considering your exit strategy, you’ve likely heard more about Employee Ownership Trusts (EOTs) recently. You’re not alone – we’ve seen an increase in discussions about EOTs over the past few years, and it’s easy to see why they’re gaining traction.
While EOTs offer great benefits for both sellers and employees, they shouldn’t be seen as the easy exit. With the number of EOTs on the rise, HMRC is paying closer attention than ever to how EOT businesses operate, so you need to know what you’re signing up for.
The rise of EOTs
EOTs were introduced through the Finance Act 2014 to encourage founders and shareholders to pass majority ownership of their company on to their employees. Perhaps the most well-known employee ownership model is the John Lewis Partnership, established in 1929, which is the inspiration behind the EOT structure we know today.
Whilst EOTs have been around in their current form since 2014, uptake was initially slow. It took until June 2022 to reach 1,000 EOTs – today, that number has jumped to c.2,500.
What is an EOT?
An EOT is a special form of employee benefit trust that allows wider employee ownership through indirect holding. Rather than staff buying shares individually, an EOT acquires a controlling stake (over 50%) in the company on behalf of all employees.
Shareholders sell their shares to a trustee company under a share purchase agreement. Shareholders and trustee company agree on the business valuation, which determines the purchase price. Once the shares are sold, there’s an outstanding debt from the trustee company to the original shareholder. The company uses its profits each year to pay off the debt until it’s cleared in full.
While the EOT must hold a controlling interest, directors can also have minority shareholdings.
Why are more shareholders choosing EOTs?
EOTs tend to be popular with owner-managed businesses. By choosing at EOT, owners can hand over the reins to a team they have built and trust implicitly. It avoids selling to a third party and protects their legacy whilst supporting growth and allowing the business to retain its values and culture.
EOTs also offer a more gradual transition, with directors able to remain in place during the transition period. Financially, the biggest benefit is the rate of Capital Gains Tax on the sale. While this has changed as a result of the 2025 Budget, from 100% CGT relief down to now 50% relief, it is still a significant incentive for those looking to sell.
From a business perspective, EOTs are often seen as a friendlier purchase process – everyone already knows each other and is likely involved in the business, making it much quicker. Day-to-day, nothing changes, which makes life easier for staff and customers and creates a solid foundation for future growth.
For employees, an EOT also allows them to benefit from ownership without providing any capital. It creates a sense of shared purpose and likely productivity increases, with everyone working towards a common goal. Staff can also access up to £3,600 of tax-free bonus each year.
A real-life EOT experience
One of our clients, Jonathan Hare, who recently completed an EOT with Champion’s support, shared his experience:
“We hadn’t come across Employee Ownership Trusts before this option was presented to us, but once we understood how the model worked, we quickly recognised it as the best strategic exit route for our business owners, which also benefitted our staff, associates and customers.
“As a business operating in a niche market with few direct competitors, we wanted to approach succession in a way that protected our legacy and our small team. Having worked with Champion over several decades, they were our natural first choice to help guide us through the EOT process.
“Champion’s early involvement in the business valuation was crucial in shaping the deal. Their end-to-end support ensured everything remained compliant and on track from both a tax and strategic perspective. It’s been a five-star experience.”
The challenge of letting go
One of the biggest challenges for business owners is stepping away from the company they’ve built. It’s natural to want to remain involved, particularly when the business represents years of hard work and embodies your values. However, and this is critical, owners cannot take the tax benefits of an EOT and continue to run the business as they did before.
With the recent rise in employee-owned businesses, HMRC is keeping a much closer eye on how these companies operate. Those that aren’t operating as they should be are facing penalties.
The logic is straightforward – if you sold your business through other means, for example, through a management buyout or to a private equity firm, you wouldn’t remain in day-to-day control. The same principle applies to EOTs.
HMRC’s rules govern how EOT businesses must be run to maintain their tax-advantaged status. Continuing to operate the business in the same way after the sale, with the same level of owner involvement, risks serious consequences.
Trust in your team
Choosing an EOT is a huge vote of confidence in your employees and their ability to drive the business forward. You selected them, trained them and built a team you have faith in. Now is the time to trust that they can build upon what you’ve created.
This doesn’t mean you disappear overnight. Many founders remain as directors during a transition period, providing guidance and continuity. However, there’s a clear distinction between a planned handover with gradually reducing involvement and attempting to maintain control indefinitely.
Getting it right
As with any exit strategy, there’s a lot to consider. The tax benefits are lucrative, the cultural advantages are genuine and the ability to secure your legacy whilst rewarding loyal employees is compelling.
But EOTs are serious commitments. Understanding HMRC requirements, planning a realistic transition and genuinely stepping back from day-to-day operations are essential to making it work.
At Champion, we’ve supported numerous clients through successful exits. We understand both the financial and emotional aspects of handing over a business you’ve built, and we’re here to guide you through every stage of the process – from initial valuation to ongoing compliance.
If you’re considering your exit options and want to explore whether an EOT is right for your business, our expert team is here to help.
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