Employee Ownership Trusts: The CGT-Free Business Sale Explained

When it comes to business exit routes, the Employee Ownership Trust (EOT) offers something unique: a CGT exemption on the entire sale proceeds, not just the first £1m. For a business owner selling a company worth £5m, £10m, or more, the EOT route can save an amount of tax that no other exit route comes close to matching.

This guide explains how EOT disposals work, what qualifies, the governance requirements, and how the structure compares with other exit options.

What Is an Employee Ownership Trust?

An Employee Ownership Trust is a trust established for the benefit of the employees of a company (or group). When the business owner sells a majority or controlling stake to the EOT, the trust becomes the dominant shareholder, holding the shares for the collective benefit of all employees.

The EOT model is not new — the John Lewis Partnership is the most famous example, structured as an employee-owned business since 1929. The John Lewis model is a Partnership rather than an EOT in the technical sense, but it illustrates the principle: employees are the primary stakeholders, sharing in the company's success.

The modern EOT structure, with its specific CGT exemption, was introduced in the Finance Act 2014, following recommendations from the Nuttall Review of employee ownership (2012). Uptake has grown substantially since then, particularly among profitable SMEs where the founder seeks a fair exit while preserving the business's culture and workforce.

The CGT Exemption: How It Works

Under TCGA 1992, s.236H, a disposal of shares to a qualifying EOT is exempt from CGT for the selling shareholders. There is no lifetime limit. This is fundamentally different from Business Asset Disposal Relief (BADR), which provides a reduced CGT rate (18% for 2026/27) but only up to the £1m lifetime limit.

For comparison: A founder selling a business for £5m net of base cost:

• Under BADR: £1m at 18% (£180,000 tax) + £4m at 24% (£960,000 tax) = total approximately £1,140,000 CGT.
• Under EOT: £0 CGT.

The saving can be transformational for larger businesses.

Qualifying Conditions

The CGT exemption applies only where all of the following conditions are met:

1. The Company Must Be a Trading Company or Holding Company of a Trading Group

The company (or the business group the EOT acquires into) must be a qualifying trading company. Investment companies do not qualify.

2. The EOT Must Acquire a Controlling Interest

The EOT must acquire (or already hold) more than 50% of the company's ordinary share capital and voting rights. A minority stake sold to an EOT does not qualify for the CGT exemption.

3. All Eligible Employees Must Benefit on the Same Terms

One of the defining principles of an EOT is that it is for the benefit of all employees — not selected individuals. The trust deed must provide for benefits to be extended to all eligible employees on the same terms, although it is permissible (and common) to differentiate by length of service, remuneration, or hours worked.

Employees must not be excluded from the benefit class except on genuine grounds (e.g., employees who have not completed a minimum service period).

4. No Other Qualifying Disposal in the Same Year

The CGT exemption is available only if the seller (or any person connected with the seller) has not made another qualifying EOT disposal in the same tax year.

5. The Selling Shareholder Must Not Retain a Majority Shareholding

Post-disposal, the sellers and connected persons must not retain more than 49% of the company. The EOT must hold the controlling interest.

6. The Company Must Not Be Controlled by a Participator

Following the sale, the company must not be close to having a participator (broadly, an individual with more than 5% economic interest) controlling it. This prevents EOT structures that are really just another form of founder control.

2023/2024 Reforms: The Finance (No.2) Act 2023 and subsequent legislation tightened several of the EOT conditions, including requirements around the independence of trustees, restrictions on contributions to sellers in excess of market value, and tightening of the "same terms" requirement. Any EOT established post-2023 must comply with the tightened rules.

The Income Tax Bonus Exemption

Alongside the CGT exemption for sellers, the EOT legislation includes a valuable income tax relief for employees: companies owned by qualifying EOTs can pay employees annual bonuses of up to £3,600 tax-free (exempt from both income tax and NIC).

This is in addition to the normal salary and does not affect the personal allowance. For a company with 50 employees, the employer can pay up to £180,000 per year in tax-free bonuses — a meaningful benefit for employee retention and morale, and a legitimate ongoing cost deduction for the company.

The exemption applies per qualifying employee per tax year, and the same "equal terms" principle applies.

Governance: How the EOT Is Structured

The EOT is a discretionary trust. The trustees are the legal shareholders of the company. Governance arrangements typically include:

• Independent trustee: An independent professional trustee is required to ensure the trust acts in the interests of employees rather than the founder. The tightened 2023 rules require genuine independence.
• Employee representative: Many EOT constitutions provide for an employee trustee or an employee advisory board that informs trustee decisions.
• Management team: The management team typically continues to run the business under service contracts. The founder often remains as chairman or a senior director, on commercial terms.
• Trust deeds and articles: The articles of association of the company and the EOT trust deed together define decision-making rights, dividend policy, and how the trust can ultimately exit its shareholding.

Founder's role post-sale: The founder typically remains involved in the business — as a director, adviser, or simply as a supplier of deferred consideration. There is no requirement to step back entirely, although governance structures should respect the EOT's primary duty to employees.

Valuation and Deferred Consideration

The EOT pays the selling shareholders market value for their shares. Market value is determined by an independent valuation, typically using standard earnings-multiple or discounted cash flow methodologies.

The practical challenge: an EOT trust does not have external capital. It cannot borrow from a bank in the way a private equity buyer can. Instead, the purchase price is typically paid via deferred consideration — the company's future profits are used to repay the selling shareholders over time.

This means:

• The founder receives a percentage of the sale price up front (often funded by a bank loan to the trust or company, or from existing cash reserves);
• The balance is paid over typically 3-7 years from the company's profits;
• The deferred payments are often structured as loan notes or earn-out payments.

The CGT exemption applies to the total value of the consideration at the time of disposal — so the entire proceeds (including deferred amounts) are CGT-free at the point of completion.

How EOT Compares With Other Exit Routes

Factor	EOT	Trade Sale	MBO	Private Equity
CGT rate	0%	18-24%	18-24%	18-24%
Liquidity	Deferred, from profits	Immediate	Partly deferred	Typically immediate
Founder control	Can retain management role	Loses control	Retained	Partial
Business culture	Preserved	Risk of change	Preserved	PE transformation risk
Employee outcomes	Collective benefit, bonuses	Unknown	Limited	Variable
Complexity	Medium-high	Medium	Medium	High

Growing Sector

Employee ownership is a growing sector in the UK economy. According to the Employee Ownership Association, there were over 1,500 employee-owned businesses in the UK as of 2025, employing around 400,000 people. The EOT sector has grown significantly since the 2014 legislation, driven by tax efficiency, business continuity advantages, and cultural appeal.

Sectors with strong EOT adoption include professional services, engineering, technology, and healthcare — typically knowledge-based businesses where retaining talented employees is critical.

Tax rules in this area have been tightened in recent years and continue to evolve. This article reflects legislation as of June 2026. Seek professional advice before proceeding with any EOT transaction.

How Global Investments Can Help

Selling your business is likely to be the largest financial event of your life. The EOT route offers unparalleled CGT efficiency but requires careful planning, independent governance, and post-sale wealth management. Global Investments works with specialist corporate advisers and tax lawyers who structure EOT transactions, and with our clients on what to do with the proceeds — whether that involves pension contributions, EIS reinvestment, offshore bonds, or estate planning. Contact us for a confidential conversation.