Overvaluing or undervaluing a company for a sale to an Employee Ownership Trust (EOT), can have a lasting and damaging impact on all key stakeholders. From October 2024, Trustees of an EOT have a legal duty to ensure that they are not paying more than market value for the shares. Here, we explore why an independent valuation is so important to the process.

What is an EOT?

An EOT is a legal structure that allows a company to be owned collectively by its employees through a trust. Instead of individual shareholdings, the trust holds a controlling stake in the business on behalf of all employees.

Capital Gains Tax relief

Announced in the November 2025 Budget and effective immediately, the sale of a controlling interest (>50%) in a trading company to an EOT attracts an exemption from Capital Gains Tax (CGT) on 50% of the total gain for selling shareholders. This was previously a 100% CGT exemption on any gain. The updated legislation means that the other 50% is chargeable at the standard CGT rates applicable to share disposals: 18% if the seller is within the basic-rate band and 24% for higher and additional-rate tax payers.

A key condition for CGT relief is that the Trustees of the EOT have a legal duty to ensure that all reasonable steps are taken to ensure that they do not pay more than market value for the shares or agree to a non-commercial rate of interest on deferred payments. HMRC’s guidance suggests that an independent valuation could be sufficient for this purpose, provided the valuer confirms that the Trustees are entitled to rely on it. A fair and defensible market value is therefore essential to protect the tax-advantaged status of the EOT.

Key parties

The valuation requires alignment among three key parties: the Trustees, the selling shareholders, and the company itself.

Trustees effectively safeguard the interests of the employee beneficiaries. A principal duty will be to ensure that the directors of the company are managing it in the best interests of the employees. The trustees have a responsibility to ensure that employees are not left with inflated debt post-EOT transaction.

Post-legislative changes, if the market value condition was not considered, the EOT beneficiaries would have a class action against the trustees on a personal basis for breach of their fiduciary duties.

Selling shareholders may wish to maximise the value they receive from a sale of their shares, however would likely have to pay income tax and possibly National Insurance Contributions (NICs) on the excess received above market value. It may be argued that the shares are not employment-related securities, but following case law (HMRC v Vermillion Holdings Ltd), this is a very difficult stance to take without upsetting HMRC.

The company, managed by its directors, will need to be solvent and remain financially healthy. The company will have to fund to the payout to the selling shareholders, with upfront and deferred cash and possibly external debt.

Risks of over or undervaluation

Overvaluation can unfairly overleverage a company or burden it with a very long deferred payback period, placing it under financial strain. This can be disincentivising for management and employees, especially as the funds to pay the purchase price come from future profits. Employees may also not reap the full benefits of employee ownership when the company is still indebted to the selling shareholders.

Undervaluation denies the selling shareholders of fair value for their hard work and value they may be entitled to, especially if the company performs better than expected post-transaction. If these shareholders remain involved within the business, undervaluation could foster resentment and hinder collaboration.

An independent valuation requires a nuanced understanding of the business, its trading history, and future trajectory. A well-supported valuation underpins the long-term success of the company and gives all stakeholders confidence that a fair and balanced outcome has been achieved.

Early engagement with advisors is key to a successful transition to employee ownership. It enables shareholders to have open and constructive conversations with their management teams, fostering alignment and transparency. The most effective EOT transitions are those where valuation, structure, and governance are not only carefully considered but also clearly communicated.

Our Valuation and Business Tax teams have supported numerous successful EOT transactions, providing both fair, independent valuations and strategic tax planning. These elements are critical to ensuring the transaction qualifies for all available tax reliefs. Get in touch if you'd like to discuss your options.