EOT Sale vs Trade Sale Comparison
Selling at least 51% of a company to an Employee Ownership Trust (EOT) is completely exempt from Capital Gains Tax for the seller. This compares the net proceeds of an EOT sale versus a traditional trade sale.
Frequently Asked Questions
What is an Employee Ownership Trust?
An Employee Ownership Trust (EOT) is a trust that holds shares in a company for the benefit of all employees. When a company owner sells at least 51% of shares to an EOT, the sale is completely exempt from Capital Gains Tax. The model gives employees an indirect stake and profit-sharing rights.
Why is an EOT sale CGT-free?
The CGT exemption for EOT sales was introduced in Finance Act 2014 (Sch 37) to encourage employee ownership. The government views EOT structures as beneficial for economic participation and long-term business stability, so it provided a significant tax incentive for owners to transition to employee ownership.
What are the qualifying conditions for an EOT sale?
Key conditions: the selling shareholder(s) must transfer at least 51% to the EOT; the company must be a trading company; the EOT must hold the majority for the benefit of all employees; terms must not be otherwise unfair; and from April 2024, sellers must be UK resident.
Can employees receive tax-free bonuses from EOT companies?
Yes. Companies owned by EOTs can pay each employee a tax-free bonus of up to £3,600 per year. This bonus is exempt from income tax (but not from NIC for employer or employee). This is an additional incentive alongside the CGT exemption on the sale.
How is the EOT sale price typically paid?
Most EOT transactions use deferred consideration — the trust pays the founder from future company profits over 3–10 years. The CGT exemption applies at the date of sale, regardless of when cash is received. Some transactions use bank or third-party financing for upfront payment.
What if the company underperforms after an EOT sale?
The founder bears the credit risk of deferred consideration — if the company struggles, payments may be reduced or delayed. This is the main risk of EOT vs trade sale. Proper security and covenants in the sale agreement help protect the vendor.
Does EOT affect employees directly?
Employees don't typically receive shares directly in an EOT model — they benefit indirectly through the trust's ownership. They may receive profit-sharing bonuses and have a voice through trustee representation. Some companies combine EOT with direct employee share ownership.
Can I sell 100% to an EOT?
Yes. While the minimum threshold is 51%, selling 100% to the EOT is common. The full CGT exemption applies to all shares transferred to a qualifying EOT as long as qualifying conditions are met.
What changes were made to EOT rules in 2024?
Finance Act 2024 introduced anti-avoidance measures: sellers must be UK resident, trustees must include an independent non-seller trustee, and sellers cannot retain excessive influence over the company post-sale. These changes addressed concerns about abuse of the CGT exemption.
What is the difference between EOT and MBO?
A Management Buy-Out (MBO) transfers ownership to management — a small group who typically buy shares using personal funds or debt. An EOT transfers ownership to a trust for all employees' benefit. MBOs attract normal CGT; EOT sales are CGT-free. EOTs also preserve a wider sense of collective ownership.
Does an EOT eliminate IHT on death?
The EOT CGT exemption is for the sale, not for IHT on death. Shares in a trading company generally qualify for Business Property Relief (BPR) at 100% for IHT — whether or not an EOT is contemplated. EOT transition is separate from IHT planning.
Can a family company use an EOT to pass ownership to children?
An EOT is not appropriate for passing ownership to family members — EOTs must benefit employees, not family. For family succession, Business Property Relief, trusts, or gradual share gifting are more appropriate. Mixing family and EOT goals creates compliance risks.