What is an Employee Ownership Trust and how is it taxed in the UK?

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An Employee Ownership Trust is a form of indirect employee ownership introduced by the Finance Act 2014 and modelled on the John Lewis Partnership structure. It has become one of the most popular business succession routes for owner-managed companies. How the sale works The selling shareholders transfer a controlling interest (more than 50% of ordinary shares) to the EOT. The company pays the purchase price to the sellers over time out of future profits -- this is a vendor-financed sale. The sellers receive no CGT on the disposal provided all qualifying conditions are met (under TCGA 1992 Schedule 7C). Key qualifying conditions -- The EOT must hold a majority (over 50%) stake immediately after the acquisition -- The company must be a trading company or the holding company of a trading group -- All eligible employees must benefit on the same terms (though benefits can be weighted by salary, length of service or hours) -- No one person (including connected persons) must have a 25% or greater interest in the trust (the "disqualifying participator" rule) -- The trustees must retain a controlling interest after the transaction Tax-free employee bonuses Once operating under an EOT, the company can pay eligible employees an income tax-free bonus of up to GBP 3,600 per year (also employer NI-free). This is in addition to normal salary and is subject to a separate qualifying employee condition. The GBP 3,600 limit has remained unchanged since 2014. Inheritance Tax implications Shares held by the EOT generally qualify for Business Property Relief (100% relief), so the EOT structure itself does not typically create IHT complications for the trust holding. Common uses EOTs are used for retirement/exit planning where founders want to preserve the business culture and protect employees, for management buy-outs where the management team cannot raise full equity finance, and as an alternative to a third-party trade sale. Recent changes From 30 October 2024 (Finance (No.2) Act 2024), several anti-avoidance changes apply: sellers cannot retain excessive influence over trustee decisions; the sale price must be at or below market value; and HMRC has enhanced information-gathering powers. The basic CGT relief and employee bonus provisions remain intact.

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