Employee Ownership Trusts (EOTs) have become one of the UK’s fastest-growing business succession models, and for good reason.
Since their introduction in 2014, the Employee Ownership Association and WREOC have reported a 1,640 per cent increase in EOT-owned businesses in the past decade and 560 transitions in 2024 alone.
However, with the recent Autumn Budget announcing that Capital Gains Tax (CGT) now applies to EOTs, companies may question whether this once tax-efficient strategy is still worth it.
What is an Employee Ownership Trust?
An EOT is when a trust acquires a controlling interest (more than fifty per cent) of a company on behalf of its employees.
EOTs can allow employees to collectively benefit from the success of the business while owners reduce their involvement over time.
To qualify for EOT reliefs, the company must be a trading business or a holding company of a trading group.
Business owners may retain a minority shareholding or continue as directors, provided they do not control the trust.
Are EOTs still beneficial post-Budget?
In this year’s Autumn Budget, Rachel Reeves announced that CGT relief on disposals to EOTs will now stand at 50 per cent – half of the previous 100 per cent relief.
HMRC reported that the cost of CGT relief has increased significantly over the years, reaching £600 million in 2021/22.
With forecasts suggesting it could rise to more than 20 times the original cost, to £2 billion by 2028–29, the Chancellor decided to act.
Despite these changes, EOTs can still offer significant tax advantages, including tax-free bonuses of up to £3,600 per employee each year and no Inheritance Tax (IHT) implications for selling shareholders.
Employee ownership can also improve incentivisation and retention due to increased involvement in the company.
Selling to an EOT can also avoid the uncertainty of third-party buyers and allow founders to protect the business’s identity and company culture.
What are the current policies of an EOT?
As with any exit strategy plan, challenges can arise, and choosing the right model for your business is important.
EOTs have faced several changes from this year’s Budget and 2024’s Autumn Budget to encourage employee ownership.
These include rules around UK residency for trustees and companies having to meet qualifying conditions for CGT relief, which were extended to four years.
For business owners considering an exit in the coming years, seeking financial advice can help you make the most of your finances and understand how the current policies will affect you.
For expert financial advice and support in relation to EOTs, contact our team today.
