Selling your business to an employee ownership trust

You've built a business that makes a steady profit and a team that knows what it's doing, and you'd like both to carry on after you step back. Selling to an employee ownership trust, often shortened to EOT, is one way to do that. The trust buys a controlling share of your company and holds it for everyone who works there, and you're usually paid over several years out of the business's own profit. The tax rules changed in 2024 and again in 2025, so it's worth knowing how it works now.

How an employee ownership trust works

An employee ownership trust is a trust set up to buy a controlling share of your company and hold it for the benefit of all its employees. For the tax reliefs to apply, the trust has to hold more than half of the ordinary shares and the votes, and be entitled to more than half of any profit paid out to shareholders and of the assets on a winding up. Many owners sell all their shares to the trust. Some keep a minority.

Your employees don't own shares directly. The trustees hold them, and the trust has to benefit all eligible employees on the same terms, though benefits can vary with pay, hours worked or length of service. If you've owned 5% or more of the company, you and people connected to you, such as close family, can't benefit from the trust. You can still work in the business and be paid for it.

The company carries on with the same name, contracts and staff, and its board still runs it day to day. The trustees look after the employees' interest as owners, which includes making sure the payments due to you are made. Many former owners stay on for a while as a director or adviser and hand over gradually.

How the sale is usually paid for

A new trust has no money of its own, so in most sales the price comes from the company. You receive an agreed first payment at completion, usually from cash the company already holds. The rest is owed to you by the trustees and paid over the following years, from profit the company pays into the trust. This is called deferred consideration, and it is in effect a loan from you.

The Employee Ownership Association calls this by far the more common approach, with the payback typically taking three to seven years, depending on what the business can afford. Some sales add bank borrowing so that more is paid at completion, and the company repays the lender over time.

What being paid over time means for you

While money is still owed, you carry some of the risk of a business you no longer control. If profit falls, payments can slow or stop. You can be paid interest on what's owed, but for sales since 30 October 2024 it can't be more than a reasonable commercial rate. Ask your solicitor early how you'll be kept informed and what happens if payments fall behind.

Employee ownership trust tax relief for the owner

The main relief is on Capital Gains Tax. Qualifying sales up to 25 November 2025 were free of it altogether. The Budget on 26 November 2025 cut the relief to half, and the Finance Act 2026 made that law. For sales on or after 26 November 2025, half the gain is taxed in the normal way in the year you sell. The other half is taken off the trustees' cost of the shares, so it would be taxed if the trust ever sold them.

You can't claim Business Asset Disposal Relief on the half that's taxed. Where your gain is taxed at the 24% higher rate, that works out at 12% of the whole gain. On a gain of £2,000,000, £1,000,000 would be chargeable, and the tax at 24% would be £240,000 before allowances. If you sold to another buyer, a gain that qualifies for Business Asset Disposal Relief is taxed at 18% from 6 April 2026, on up to £1,000,000 of gains over your lifetime. Ask your accountant to run both.

The tax is due for the year of the sale, even if much of the price comes later. If you're paid in instalments over more than 18 months, you can ask HMRC to let you pay the tax in instalments too, for up to eight years.

The conditions for the relief

Your advisers will check these in detail. In outline:

• The company must be a trading company, or the parent of a trading group.
• The trust must benefit all eligible employees on the same terms.
• The trust must gain control during the tax year you sell and keep it to the end of that year. If you keep some shares and sell them to the trust in a later tax year, that sale won't get this relief.
• People who own 5% or more and work in the business, with employees connected to them, can't make up more than two-fifths of the workforce.
• The trustee rules added in 2024, below, must be met.
• You claim on your tax return, giving the number of employees and the price you received.

The rules that changed on 30 October 2024

The Autumn Budget 2024 tightened the rules for employee ownership trusts, and the Finance Act 2025 made the changes law. They apply to sales on or after 30 October 2024 unless shown.

• Trustee independence. Owners and former owners of 5% or more, and people connected to them, must be fewer than half of the trustees and can't control the trust through the trust deed. Where there's a trustee company, the same test applies to its directors.
• UK residence. The trustees, taken together, must be UK resident when you sell and for the rest of that tax year.
• Market value. The trustees must take all reasonable steps to make sure they don't pay more than market value, which HMRC says will typically mean an independent professional opinion. Interest on deferred payments must not exceed a reasonable commercial rate.
• Four tax years of clawback. If the trust stops meeting the conditions within the four tax years after the tax year you sell, your relief is withdrawn and your tax is worked out as if you'd never claimed it. The period used to be one tax year. A later breach is taxed on the trustees instead.
• More information. Claims made on or after 6 April 2025 must state the number of employees and the price.
• Payments to the trustees. Money the company pays the trustees to fund the purchase, including reasonable interest and costs, can be relieved from income tax in their hands on a claim.

Tax-free bonuses for your team

A company controlled by an employee ownership trust can pay each employee up to £3,600 a tax year in bonuses free of income tax. National Insurance is still due in the normal way. The scheme must be open to all employees on the same terms, though you can require up to 12 months' service, and amounts can vary only by pay, hours worked or length of service. For payments made on or after 30 October 2024, directors can be left out.

The bonus comes out of profit, so while the company is also paying you, there may be less of it to go round.

Who an employee ownership trust suits

It tends to work best where:

• The business makes a steady profit and turns it into cash.
• A management team can run the business without you, and wants to.
• You're comfortable being paid over several years rather than mostly at completion.
• You'd like the business to stay independent, with its name and its team.
• The team is big enough for shared ownership to mean something. The Employee Ownership Association lists 10 or more employees among its criteria for a good fit.

It's harder where profit is thin or uneven, the business depends on you personally, you need most of the money at completion, or the business needs heavy investment, because cash paid to you can't also go into equipment or premises.

The advantages and the drawbacks

In its favour

• There's no outside buyer to find, and fewer people need to know while it's arranged.
• The business stays independent, which many staff and customers welcome.
• Half the gain is free of Capital Gains Tax.
• Your team can share in the profit through tax-free bonuses.
• You choose the timing. The Employee Ownership Association puts the average at about seven months from decision to completion.

Against it

• Most of the price usually comes later, from profit you no longer control.
• The price can't be more than market value, and a trade buyer that gains something particular from your business may sometimes pay more.
• Tax on half the gain is due before you've received all the money.
• The conditions must hold for four tax years after the sale.
• It needs specialist legal, tax and valuation work, and an HMRC-commissioned study found costs sometimes ran higher than owners expected.
• Once the trust owns the company, any later sale is the trustees' decision.

How it compares with other ways to sell

Each route has a different buyer, a different way of paying and different tax. Our guide to how to sell a business covers the process most sales share.

A management buyout puts the business in the hands of the few people who run it. Selling a business to employees through a trust spreads ownership across everyone. Plenty of owners look at more than one route before deciding.

The steps, and who to involve

1. Talk to your accountant. Check that the profit and cash can support payments to you for several years, and compare the tax with selling another way.
2. Find advisers with EOT experience. You'll want a solicitor and a tax adviser who have done it before. The Employee Ownership Association has a guide and lists specialists.
3. Get an independent valuation. The trustees need to rely on it to show they aren't paying more than market value. Our guide to how to value a business explains the basics.
4. Agree the terms. The price, the first payment, the schedule for the rest, any interest, and what happens if payments fall behind, often set out first in heads of terms.
5. Set up the trust. Choose trustees, individuals or a trustee company, who are UK resident and mostly independent of you.
6. Ask about HMRC clearance. Your tax adviser may suggest applying to HMRC in advance, for example under the rules on transactions in securities, so you know your proceeds will be taxed as a capital gain rather than as income.
7. Tell your team and complete. Plan how employees will hear about it and have a say. Afterwards, claim the relief on your tax return, and ask HMRC about paying by instalments if you're being paid over more than 18 months.