UK Employee Ownership Trusts (EOT): Paving the Way for Sustainable Business Transitions

The use of UK Employee Ownership Trusts (EOTs) for selling businesses to employees is on the rise and is expected to continue growing in 2025. A recent survey indicates that two-thirds of SME owners may sell or divest within the next decade, with employee ownership providing a structured solution for business continuity and job security. Legislative changes are being discussed to support EOTs, aiming to foster sustainable business practices and shared ownership culture.

Staying up to date with the latest legislative changes and reforms is essential, given how quickly the political and economic landscape of the United Kingdom is changing. Under the new government led by Prime Minister Sir Keir Rodney Starmer, significant attention is being directed towards Employee Ownership Trusts (EOT). This relatively new business model is gaining traction and has become a focal point in the current political discourse, especially following the UK 2024 elections.

A UK Employee Ownership Trust (EOT) is a special type of trust designed to enable companies to become employee-owned. The previous UK government first proposed this idea in the Finance Act 2014 in an effort to promote employee ownership among companies.

The previous UK governmental consultation proposed measures to improve the EOT regime and ensure its tax advantages if appropriately targeted. These included a specific income tax exemption for certain funding received by EOT trustees, changes to the qualifying conditions for paying income tax-free bonuses, and requiring that EOTs be UK residents for tax purposes.

Over the past few years, there has been a notable increase in the number of business owners using Employee Ownership Trusts (EOTs) to indirectly sell their companies to their employees. It is likely that this trend will continue in 2025.

In an employee ownership report that was released at the end of the previous year, 500 people who were 43 years of age or older and had a stake of more than 10% in privately held SMEs with between 10 and 249 employees—across a range of sizes, industries, and geographical locations—were surveyed.

According to the survey’s findings, two-thirds of these owners—which correspond to 120,000 SMEs—are expected to sell or divest within the next ten years, with at least forty-three percent indicating that the sale or closure of the company is most likely to occur.

Employee ownership is still a viable option for companies struggling to find a solution, especially in cases where management succession is unclear or the strategy has not materialized. It offers a controlled process for changing leadership, ensuring business continuity, and safeguarding jobs.

But nowadays, what can investors and businessmen expect from the new Labour government? Sir Keir Starmer wishes to complete the UK legislative reform to ensure that gifts from the target to the trustees (to fund deferred payments) are not distributions, as well as new rules pertaining to the trustee board's constitution (limiting seller control and requiring representation from employees and/or an independent trustee), are among the proposals presently being reviewed.

The rule that considers any shareholder holding 5% of any class of shares to be a participator, regardless of the class’s small percentage of the total share capital, is also being reviewed because it may discourage employees from choosing to hold EMI options over other share classes and, in the event that the workforce is small, may result in disqualification.

Industry experts think that EOTs can become a pillar of sustainable business practices if they receive the right kind of legislative support and are given clear guidelines. Establishing a shared ownership culture helps companies not only secure their future but also develop a workforce that is more resilient and driven.

Even though the recent landscape of employee ownership is changing, the underlying idea stays the same: giving employees a say through ownership is a potent way for firms to secure their future prosperity. The ongoing implementation and improvement of EOTs will benefit employers as well as employees.

Luciano Magaldi Sardella is an MBA and alumnus at the European Open University, Faculty of Economics.