The Benefits of Employee Ownership Trusts (EOTs) for SME Owners
Employee Ownership Trusts (EOTs) have become an increasingly popular structure for small and medium-sized enterprise (SME) owners looking to preserve their company’s culture, independence, values, and their employees’ interests. There are now around 2,000 EOTs in the UK - a significant rise from just 576 in mid-2021. What is exactly driving this growth, and why should SME owners seriously consider an EOT as part of their succession planning?
What is an EOT?
Introduced by the Finance Act 2014, an Employee Ownership Trust is a structure designed to facilitate employee ownership in a sustainable and tax-efficient way. A trust is established to acquire and hold a controlling interest in a company on behalf of its employees. Typically, the outgoing owner sells more than 50% - often 100% - of their shares to take maximum advantage of the capital gains tax relief available to them (see below for more details), usually funded over time through the company’s future profits.
Notable examples of businesses structured as EOTs include John Lewis, Waitrose, Arup Group, Go Ape, and Richer Sounds.
Tax relief and financial advantages for business owners
One of the main advantages for SME owners selling to an EOT is the Capital Gains Tax (CGT) relief. Normally, when selling shares in a business, a selling shareholder would be liable for CGT on the sale proceeds. However, where the sale is to an EOT that meets the necessary statutory conditions (such as the trust acquiring a controlling interest of more than 50%), the selling shareholder can claim full CGT relief, paying no tax at all on the gain.
This is a compelling incentive, especially when compared to traditional business sales where entrepreneurs may face up to 18% CGT (at the basic rate) or 24% CGT (at the higher rate) or 14% CGT if Business Asset Disposal Relief (previously known as Entrepreneurs’ Relief) is applicable.
In addition, the EOT structure also offers inheritance tax (IHT) advantages. Transfers of shares into an EOT can qualify for 100% relief from IHT if certain conditions are met. This can be an important consideration in estate planning.
Often, sellers remain involved in the business post-sale, often retaining a seat on the board and continuing to contribute to the company’s direction.
Benefits for employees and the business
EOTs offer advantages not only to sellers, but also to employees. While individual employees do not hold shares directly, they become beneficial owners, with profits for the benefit of the workforce as a whole. Subject to certain criteria being satisfied an employee of a company that is owned by an EOT can be eligible to receive an annual bonus of up to £3,600, which will be income tax-free (although the bonus will remain subject to national insurance contributions), boosting morale and fostering a more committed and motivated workforce.
Indeed, employee-owned businesses are often associated with better employee engagement, a drive for innovation, high staff retention, increased productivity, and stronger company culture. Although employees will not have direct control over the direction of the company, some businesses (often those with a large workforce) will choose to establish an employee council. The purpose of this council is to gather and relay employees’ concerns to the trustees, which may in turn help shape how the company is run.
By giving employees, a real stake in the business’s success and by ensuring long-term independence, EOTs can significantly enhance the performance and resilience of the organisation.
A growing trend across the UK
In 2024 alone, 1,756 UK companies transferred ownership to an EOT, accounting for around 6% of all business transfers nationwide.
This sharp rise reflects a growing recognition of the benefits EOTs provide – both from a financial perspective and in terms of values-based succession planning. It also signals a shift in attitudes towards more sustainable models of business ownership.
Industry reports suggest the trend is set to continue throughout 2025 and beyond, with more SME owners exploring employee ownership as an alternative to trade sales or private equity buyouts.
Why EOTs make sense for succession planning
For many SME owners, succession is far more than just a financial transaction; it marks a personal and emotional turning point. Increasingly, EOTs are being recognised as a compelling option, offering a unique blend of financial efficiency, business continuity, and employee empowerment.
Crucially, adopting an EOT does not require the business owner to be at retirement age. In fact, many EOT transactions now involve sellers who remain on the board and actively engaged in day-to-day business decisions. EOT ownership is therefore seen as a flexible ownership model that allows owners to gradually step back from day-to-day operations while safeguarding the independence and ethos of the business.
An EOT structure also offers reassurance to employees, providing certainty that the company will not be absorbed through an external acquisition. This sense of continuity and long-term stability can significantly boost staff morale and loyalty.
For business owners who care deeply about the future of their business and their employees, EOT ownership provides a values-led path forward that preserves the legacy they have built.
This article was written for Handpicked Accounts by Simon Nolan of Myerson Solicitors.
