Smile and celebrate the evolving employee ownership landscape

Recent statistics from the EOA and WREOC suggest there are now approximately 2,470 employee-owned businesses in the UK with around 358,000 employee owners. TLT’s EOT team is currently advising on transitions to employee ownership in England, Northern Ireland, Scotland and Wales. Lately we have seen more than simply an increase in the volume of EOTs. The terms under which sales to an employee ownership trust (EOT) are taking place reflect a more sophisticated and diverse market. In celebration of EO Day 2025, the team at TLT have been reflecting on some of these changes.

Today we celebrate EO Day and the theme this year is “smile”. We know many employees who are very happy to be working for an employee-owned business.

While employee ownership is not a new concept, the EOT is a special type of discretionary trust established by the Finance Act 2014 for the purpose of acquiring a controlling interest in a company for the benefit of its employees. EOTs were introduced to incentivise more business owners to transition to employee ownership by introducing certain tax reliefs for qualifying EOTs.

Recent research from the UK EO Business Register suggests the three leading sectors for employee-ownership are Professional, Scientific and Technical Activities, Manufacturing and Construction. While this broadly reflects our experience of sales to EOTs, we have also seen that the EOT model itself is versatile enough to work in different industries, including retail, gaming, travel and IT. In our experience, the common factor between successful employee-owned businesses is not the sector or industry but rather the underlying culture of the business. Employee ownership builds stronger businesses, although it will not solve all existing issues.

The Autumn Budget 2024 introduced several changes (which took effect from 30 October 2024) intended to end the involvement of offshore trustees, to ensure transactions are taking place at market value or below and to ensure selling shareholders aren’t retaining control of the company going forward. In addition, the “clawback period” (during which the selling shareholders might lose the benefit of their capital gains tax relief if the qualifying conditions are breached) has been extended to the fourth tax year following the end of the tax year in which the disposal took place. While these measures alone may not be enough to disincentivise selling shareholders who are only seeking to take advantage of any potential tax reliefs, it does demonstrate the intention for EOTs to be a long-term succession option, rather than simply a way to extract value from a business.

Traditionally, sales to EOTs have relied on vendor financing as funding from specialist lenders wasn’t always suitable for every situation. Vendor financing meant selling shareholders were often waiting years to be paid out. While the deal terms were usually friendlier than an arms’ length sale to reflect the risk taken by the selling shareholders in agreeing to unsecured deferred consideration, vendor financing was often a deterrent for a number of shareholders whose businesses were otherwise well-suited to employee ownership.

In recent years, we have seen an increased appetite from lenders to work with businesses on their transitions to employee ownership. We have worked with numerous banks who have put the time and effort into becoming well-versed on the structure of EOTs. Third party financing not only lowers the risk for sellers but can also accelerate deal timelines, meaning employee owners have a shorter wait until what is often called “Debt Free Day” (being the point when the selling shareholders have been paid in full and the employee owners can embrace the new structure). This welcome development should lead to more EOTs in the UK. We also consider this could lead to stronger EOTs because of the stringent financial and governance requirements of lenders.

As we reflect on EO Day 2025, it is encouraging to see employee ownership as part of the conversation when business owners are making an informed choice regarding the most appropriate succession option.

To learn more about our experience advising businesses through the entire employee ownership journey, visit our EOT In Focus page.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at June 2025. Specific advice should be sought for specific cases. For more information see our terms and conditions.