Employee Ownership Trusts (EOTs) are rapidly becoming a favoured model for business succession in the UK, particularly amongst small and medium-sized enterprises, with upwards of 2,450 businesses across the UK becoming EOT owned as of August 2025. The mechanics, benefits and tax implications of EOTs are complex and require careful consideration. However, when done right, EOTs are a sustainable and employee-centred approach to transferring company ownership. Sellers often cite tax incentives, deal certainty, maintaining company and community legacy and future business sustainability as primary drivers for pursuing an EOT transaction.
What is an EOT?
An EOT is a form of employee benefit trust specifically designed to hold a controlling interest in a company on behalf of its employees as a whole. The EOT becomes the legal owner of the shares in the company and company employees become the beneficiaries of the trust.
EOTs are established to acquire shares in a company from exiting shareholders and must be administered by one or more trustees (the Trustees). Typically, Trustees might include employee, management and professional trustee representation. Exiting shareholders, including those who retain a minority holding or are due deferred payments, may also seek representation. As with all companies its directors and senior management team will continue to manage the day-to-day operations and decisions of the company. An employee council may also be established to help serve as a representative body sharing employee perspectives with senior management and Trustees while not holding direct decision-making authority in the company.
Once established, the EOT must purchase a controlling interest in the company (being more than 50% of the issued voting share capital of the company). The employees do not own the shares directly but benefit instead from the EOT’s ownership of the company which also streamlines processes for new joiners and exiting employees within the company.
It is worth noting that companies controlled by EOTs can still incorporate incentive plans and option schemes.
Key benefits of an EOT
1. Tax
Introduced by the UK Government to encourage employee ownership, EOTs offer significant tax incentives and there are three incentives currently available to qualifying EOTs:
- Capital gains tax relief in respect of the disposal of the controlling interest in a company to an EOT. The seller is treated as transferring the shares on a no gain/no loss basis and therefore has no capital gains tax liability.
- An income tax exemption in respect of bonus payments to employees of an EOT by the relevant company (up to a cap).
- Inheritance tax relief on certain transfers into and from an EOT.
2. Employee engagement
- EOTs can significantly boost employee engagement by giving employees an indirect stake in the company which can lead to increased accountability, motivation, and a greater sense of ownership.
- EOTs offer employees the opportunity to have a vested interest in the success of the business which can ultimately lead to higher productivity, innovation, and improved business performance.
3. Preservation of culture
- Many businesses which have transitioned to an EOT have reported a range of benefits including enhanced employee motivation and productivity, improved attraction and retention of talent and preservation of company and community culture and values.
- Shareholders who have sold shares to EOTs have cited that the transaction allows for a smooth transition of ownership and leadership that may be absent in company acquisitions by third parties. EOT transactions can also be viable exits for shareholders where there is no obvious third-party purchaser.
Points to consider
- Appointing suitable Trustees is critical to the success of an EOT and consideration should be given to any potential conflict of interest between the employees, seller(s) and directors of a company.
- While EOT sellers can serve as Trustees, they must not make up the majority of the trustee board, particularly before they have been fully paid.
- There is no requirement for an EOT to acquire the entire issued share capital of a company but the EOT must acquire a controlling interest.
- There are a number of funding models available in the context of establishing an EOT including a voluntary capital contribution or the provision of third-party finance and each model will have its own distinct set of considerations.
- Common issues in respect of EOT eligibility for tax incentives arise where EOTs fail to satisfy one or more of the following:
- The all-employee benefit requirement - the terms of the EOT trust deed must apply settled property for the benefit of all employees and not only a subset of employees (such as the management team only) and must do so for all employees on the same terms. Settled property must not be capable of transfer to a separate trust nor can Trustees be authorised to make loans to beneficiaries (i.e. the employees themselves).
- The equality requirement - the terms of the EOT trust deed must require any distribution or bonus to employees to be granted to all employees equally on the same terms. Note ‘same terms’ does not mean equally as to amount, but must be indiscriminate, determining amounts for all employee beneficiaries in the same manner, such as based on length of service, contracted working hours or remuneration.
- The controlling interest requirement - the EOT must hold more than 50% of the ordinary share capital of the relevant company, control the majority of shareholder voting rights and be entitled to over 50% of profits eligible for distribution.
- The trading requirement - the EOT must acquire shares in a trading company or the principal of a trading company (such as the holding company of a trading company).
How A&L Goodbody can assist
We have a cross-departmental team available to advise on all elements of the EOT process including on the ownership structure, transaction mechanics and funding models, transitioning to EOT ownership and ensuring full compliance with UK law throughout the process.
We can assist with all aspects of the transition, including establishing an EOT, drafting the acquisition and finance documentation, advising on governance models and facilitating employee engagement to ensure the long-term success of the company post transaction.
For further information in relation to this topic and how we can assist, please contact Peter Stafford, Louise Bailey, or any member of the ALG Northern Ireland Corporate and Banking teams.
Date published: 17 November 2025
