The model is simple in concept: rather than employees holding shares individually, a trust acquires and holds a controlling stake in the company for the benefit of the entire workforce. The John Lewis Partnership is the most famous example, but EOTs are now used across all sorts of sectors, from professional practices and manufacturers to businesses in the health and social care sectors.
Recent reforms — most notably a reduction in capital gains tax relief from November 2025, alongside tighter governance requirements introduced from October 2024 — have changed the landscape. But for business owners thinking seriously about succession planning, the EOT remains a compelling option. The tax reliefs, while less generous than they were, are still significant; and the commercial benefits of the model – workforce engagement, retention, and a structured route to exit – are unchanged.
Why businesses choose the EOT model
For owner-managers thinking about the future, the EOT model offers an attractive succession route. It’s particularly well suited to founders who want to retire or step back from day-to-day involvement, even where there’s no obvious buyer or management team ready to acquire the business outright. For those who want to ensure that the fruits of the business are shared equitably with employees for the long term, an EOT can enshrine that principle in its very structure. And importantly, it’s a flexible model. It doesn’t have to be “all or nothing”. Many companies give employees a majority stake through an EOT while the original owners retain a significant shareholding themselves.
There are broader commercial benefits too. Employees who have a genuine stake in the success of the business are more motivated, more committed. And a meaningful share in profits can be a real differentiator in competitive labour markets.
The tax benefits
Following the Nuttall review on employee share ownership in 2012, the government introduced the EOT in Finance Act 2014, with the express intention of encouraging broader employee ownership. The tax reliefs that accompanied the new legislation were a central part of that encouragement, and they remain significant even though the position has evolved.
Capital gains tax relief. Originally, individual shareholders who sold their shares to a qualifying EOT could claim full exemption from capital gains tax. From 26 November 2025, this relief has been reduced: 50% of the gain on a qualifying disposal to an EOT is now exempt, with the remaining 50% taxable at the prevailing CGT rate. For higher-rate taxpayers, this means an effective rate of approximately 12% on the full gain. Business Asset Disposal Relief cannot be applied to the taxable portion.
Even at this reduced level, the relief compares favourably to a standard disposal. CGT relief is available in the tax year in which the EOT first crosses the 51% ownership threshold; later sales to the EOT after that point may be subject to CGT in the usual way.
Tax-free bonuses. The company can pay income tax-free bonuses of up to £3,600 per employee per tax year (though National Insurance contributions still apply). The payments must be in addition to regular salary and made under a scheme open to all qualifying employees on the same terms – which can vary by reference to salary, length of service or hours worked, provided everyone receives something. Since October 2024, directors can be excluded from the bonus scheme, giving companies more flexibility in how they structure the benefit.
Inheritance tax. Disposals of shares to an EOT are not treated as a transfer of value for inheritance tax purposes, which means there are no IHT implications on the transfer itself. The EOT legislation also includes reliefs that significantly simplify the broader IHT position, meaning most EOT structures will not incur a charge.
How an EOT is established
EOTs are available to businesses operating through a limited company. The holders of more than 50% of the shares must be willing to transfer to the EOT, and shares can be gifted or sold – for full value or at a discount.
The trust must exist for the benefit of all employees (excluding only those who hold 5% or more of the company’s shares), and its assets can only be used for the benefit of eligible employees on the same terms. At the end of the relevant tax year, the EOT must hold a controlling interest – more than 50% of the company’s ordinary share capital and voting power.
Funding the acquisition is a practical question with several answers. The company may take out a bank loan and contribute the proceeds to the trust. Alternatively, the company can make contributions from its own profits. In many cases, the purchase price is paid on deferred terms, fixed at the date of contract but settled in instalments out of profits contributed to the EOT over time.
Governance and compliance: the 2024/25 reforms
The legislative framework around EOTs was significantly tightened by reforms introduced from 30 October 2024. Trustees must now be UK resident, and former owners or persons connected with them cannot form a majority of the trustee board. Trustees are also required to take reasonable steps to ensure that the price paid for shares does not exceed market value – a measure aimed at preventing abuse of the relief. The clawback period for CGT relief has been extended: disqualifying events now trigger consequences if they occur before the end of the fourth tax year after disposal, rather than the end of the following tax year as was previously the case.
These changes reflect the government’s desire to preserve the EOT model while addressing concerns about misuse. In our experience, well-advised transactions have little difficulty meeting the new requirements.
Getting it right
EOTs come with a long list of legal conditions, both on and after implementation. Getting those right matters. But it’s equally important to make sure the strategy behind the EOT works for the business long term. That usually means careful budgeting – former owners are often paid out over several years – and a clear plan that works for both the company and its workforce.
Senior executive strategy deserves particular attention in some sectors. EOT-backed businesses find it harder to offer meaningful equity incentives to existing managers or senior hires, so alternative remuneration structures may need to sit alongside the EOT.
It’s also worth recognising that once an EOT is in place, reversing out of it can carry substantial tax costs – if, for example, a suitable buyer comes along. Owners, the company and the board should all go in with a clear understanding of where the risks and costs sit, not just the benefits.
Looking ahead
Despite the reduction in CGT relief from November 2025, the EOT remains a tax-efficient and commercially attractive route for business succession in the UK. The combination of meaningful tax reliefs, workforce engagement, and structural flexibility makes it a model worth serious consideration – whether that means stepping back entirely or beginning a gradual transition.
This article provides general guidance only. For advice on your specific circumstances, please get in touch with our team.
