Why an Employee Ownership Trust could be the right exit for your business

Employee ownership continues to go from strength to strength as a credible and attractive exit route for UK businesses. Recent changes to the tax treatment of employee ownership trusts (EOTs) have sharpened the focus on what really makes employee ownership compelling. For many businesses, the shift away from tax-driven motivations reinforces the long-term strategic value of the model.

Over the last few years, the popularity of EOTs as an exit route has grown and EOTs have increasingly become part of the conversation with founders when discussing the best option for their company’s future.

The latest statistics published by the Employee Ownership Association in March 2026 report that there are now 2,824 employee-owned businesses in the UK, of which around 500 transitioned in 2025 alone. There are now approximately 547,971 employee owners across the UK. This continued growth highlights that, despite recent changes, EOTs remain firmly established in the UK exit landscape.

But it’s not all been plain sailing - the last 12 months have been a bit of a turning point for EOTs. The regime has been tightened up and the tax benefits have been scaled back prompting some business owners to question whether selling to an EOT remains a worthwhile option. We think the answer is a resounding yes, and in celebration of EO Day today, in this article we discuss what has changed and the enduring benefits of employee ownership.

What is an EOT?

An EOT 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 EOT holds the shares on the terms of the trust for the employees of the company, who are the beneficiaries of the trust — this represents indirect employee ownership.

What has changed?

The big headline in the employee ownership world was the Government's unexpected announcement in the 2025 Budget that, from 26 November 2025, the 100% capital gains tax (CGT) exemption available to founders selling a controlling interest to an EOT would be reduced to 50%. Sellers now pay CGT on half the gain, resulting in an effective rate of CGT of 12%.

So, what does this mean in practice? Whilst EOTs are no longer a "tax-free” exit, they continue to be a tax-efficient exit. Even with an effective tax rate of 12%, EOTs are still often competitive as an exit route when weighed against a fully taxable trade sale or private equity transaction, particularly where certainty of buyer, continuity of leadership and business stability are priorities.

The change to the tax rate reinforces the message that EOTs should be about genuine employee ownership, not just tax planning, focusing on passing ownership to employees for the longer term, and not solely to access the tax benefits.

What are the continuing benefits of the EOT model?

Succession planning and preservation of legacy

For many business owners, particularly family-owned or owner-managed businesses, protecting what they have built over many years is a key concern. A sale to an EOT can offer founders a way to exit their business while preserving its culture and values.

A sale to a trade buyer could lead to relocation or job losses, and so a sale to an EOT is an alternative way to empower employees: securing their jobs and keeping their employer local.

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.

Rewarding employees - tax-free bonuses

One of the most attractive and enduring financial benefits of the EOT model is the ability to reward employees in a highly tax-efficient way. The employees will be the beneficiaries of the EOT 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).

The EOT model has a key social benefit: rewarding all employees who have worked towards its success on an equal basis, rather than profit staying primarily with a small group of shareholders.

Enhanced productivity and business performance

The evidence for the business benefits of employee ownership is striking. Research commissioned by the Employee Ownership Association as part of its 2023 EO Knowledge Programme found that employee-owned businesses are between 8% and 12% more productive, and invest more in their people, innovation and communities than other businesses.

Employee empowerment and governance

As the EOT 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 EOT 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, elected by the employees as a whole, 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 some EOT models, the terms of the EOT may expressly require the consent of an employee representative or employee council before strategic decisions can be made.

Supporting your ESG agenda

For businesses with strong environmental, social and governance (ESG) commitments, the EOT model is a natural fit. The EOT model directly supports ESG objectives by placing employees at the heart of both decision-making and financial reward. This ensures a fairer distribution of profits while also fostering a culture of accountable, transparent governance. Through mechanisms like tax-free bonuses and inclusive trustee arrangements, EOT ownership can create an environment where business growth and social responsibility successfully co-exist, preserving a company's ethos and values in the process.

An EOT-owned company looking to expand — by either acquiring a complementary business or seeking outside investment — must often secure the consent of the EOT trustee and, in some cases, employee representatives or an employee council. While these considerations can lengthen the deal timeline, they ensure the purchase aligns with the company's established culture and social values, in turn protecting its long-term environmental and community commitments.

Flexibility for founders

The EOT model offers greater flexibility than many founders realise. As long as the EOT acquires a "controlling interest" in the company — broadly, more than 50% of the ordinary share capital and voting rights — it is possible for the founders to retain a shareholding in the company. This means founders are not forced to sell everything on day one.

Continued incentivisation of key talent

The EOT model enables a business to incentivise key employees through share-based arrangements. In addition to the annual income tax-free bonus which can be paid to eligible employees, employee share plans can play a crucial role in the retention and motivation of employees following the transition.

Enterprise Management Incentive 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.

Final thoughts

Our expectation is that the employee ownership sector in the UK will continue to grow, but with fewer tax-driven deals and more sustainable EOTs with a genuine employee ownership ethos.

The ability to preserve a business' legacy and values, to reward and empower employees, to support an ESG agenda, and to achieve a genuinely competitive exit on the right terms remain powerful reasons why the EOT continues to be one of the most interesting and rewarding exit routes available to business owners today.

In addition to the tax efficiencies of selling to an EOT, founders considering an EOT should focus on whether the model aligns with their long-term priorities and how it would work in practice for their business.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at June 2026. Specific advice should be sought for specific cases. For more information see our terms and conditions.

How can we help?

TLT has been a leading firm active in the employee ownership sector for a number of years. Our specialist, and experienced, employee ownership lawyers have a diverse range of clients in England, Wales, Northern Ireland and Scotland.

We provide insightful strategic direction to employee-owned businesses at every stage of their journey and have led a number of the most high-profile employee ownership transactions within the UK.

If you would like to discuss whether a sale to an EOT might be right for your business, please get in touch with our employee ownership specialists below.