Employee Ownership Trusts

An Employee Ownership Trust is a special type of discretionary trust which is established by a company, for the purpose of acquiring a controlling interest in that company.

The trustee of the Employee Ownership Trust holds the shares on the terms of the trust for the employees of the company, who are the beneficiaries of the trust. This means that the trustee must act in the best interests of the employees.

Following a sale to an Employee Ownership Trust, the day-to-day operation of the trading company continues to be carried out by the board of directors of the trading company with the trustee overseeing the board of directors and the overall business strategy.

There are a number of statutory conditions which a trust has to satisfy in order to qualify as an Employee Ownership Trust including:

• a requirement that the company whose shares are acquired is either a trading company or the parent company of a trading group;
• a requirement that the trust acquires a “controlling interest” in the company;
• a requirement that the assets of the trust are used only for the benefit of the company’s employees and that the employees benefit on the same terms;
• a trustee independence requirement preventing selling shareholders (or persons connected with them) from retaining control of the company post-sale to the Employee Ownership Trust;
• a requirement that the trustee of the Employee Ownership Trust is UK resident; and
• a requirement that the trustee takes all reasonable steps to make sure that they don’t pay more than market value for the shares in the company.

A sale to an Employee Ownership Trust can offer the founders a way to exit their business whilst preserving the ethos, culture and values of their business and rewarding those who have worked to make it a success. In particular, a sale to an employee ownership trust can be a practical solution for family-owned or owner managed businesses considering long-term succession planning.

Founders selling their business to an Employee Ownership Trust can benefit from a 50% relief from capital gains tax on the sale of their shares if certain conditions are satisfied at the time of the sale and for a specified number of tax years following the tax year in which the sale occurs (being one tax year for sales before 30 October 2024 and four tax years for sales on or after that date).

No. The Employee Ownership Trust model is flexible so that as long as the Employee Ownership Trust acquires a “controlling interest” in the company, it is possible for the founders to retain a shareholding in the company. In order to acquire a “controlling interest”, the Employee Ownership Trust must acquire, broadly, more than 50% of the ordinary share capital and voting rights in the company.

Founders should consider carefully what proportion of their shareholding they wish to sell to the Employee Ownership Trust and note that if they don’t sell all of their shares to the trust in one transaction, they may not be eligible for the 50% capital gains tax relief on a subsequent sale of the balance of their shares.

The employees will be the beneficiaries of the Employee Ownership Trust which means that, subject to certain conditions, they are eligible to receive an annual bonus of up to £3,600 per employee which can be paid to them free of income tax (although National Insurance contributions will apply).

As the Employee Ownership Trust is established for the benefit of the employees, it is usual for the employees to play an important role in determining how the company is run following the transition. Often the employees will elect one (or more) employees to act as trustee of the Employee Ownership Trust or, if the trustee is a company, to sit as a director on the board of directors of the trustee company. In addition, the business may establish an employee council so that the views of the employees can be taken into account by the board of directors of the company and the trustee in their decision-making.

In contrast to a third-party sale, in an employee ownership model the founders will typically continue to work in the employee-owned business (in some capacity) following the transition at least for a period of time, providing stability and reassurance to the employees.

Yes it is. In addition to the income tax free bonus which the employee-owned company can pay to eligible employees each year, employee share plans can play a crucial role in the retention and motivation of employees following the transition.

We have helped numerous employee-owned companies establish share plans for employees.

EMI options and CSOP options are both commonly adopted forms of HMRC tax-advantaged employee share incentive. These incentives work on the basis that an employee is granted a right to buy shares in their employer in the future at a price fixed at the date of grant. The price is usually the market value of the underlying shares at the date of grant. The employee may exercise the right to buy the shares at set vesting dates or when meeting set performance conditions, provided they remain in employment. Options are simpler to administer than plans that provide for the outright acquisition of shares and are risk free for employees since they don’t have to exercise their right to buy the shares.

There is a limit on the market value (at the date of grant) of the shares over which EMI options and CSOP options can be granted to an employee of £250,000 and £60,000 respectively and there are certain statutory conditions which must be satisfied in order for a company to qualify to grant these types of options.

Alternatively, the company may wish to consider establishing a growth share plan, which is a popular way to incentivise employees who are unable to grant EMI or CSOP options. Under a growth share plan employees acquire a new class of shares in the company and the new class is only entitled to participate in any future increase in the value of the business. The entitlement to future value only means that at the outset the shares are worth very little, meaning that the employee typically only pays a small amount to acquire the shares. Although growth shares are not an HMRC tax-advantaged form of share plan, they provide a similar tax outcome to EMI and CSOP options.

Care needs to be taken when implementing any share plan for an employee-owned company to ensure that the trust continues to satisfy all the conditions necessary for it to qualify as an Employee Ownership Trust. However, with careful planning, share incentives can be successfully implemented by an employee-owned company.

To read more, download our guides to EMI options, CSOPs and growth shares.

An unexpected change to the capital gains tax relief available on sales to an Employee Ownership Trust was announced at the Autumn Budget 2025.

This means that for disposals to an Employee Ownership Trust on or after 26 November 2025, the 100% capital gains tax relief that was previously available will be reduced to a 50% capital gains tax relief and neither business asset disposal relief nor investors’ relief will be available to reduce the chargeable gain. The government intends to legislate for this change in the Finance Bill 2025-26.