Employee Ownership Trusts have become one of the most popular succession planning routes for owner-managed businesses in the UK. Since their introduction in 2014, thousands of companies have transferred into EOT ownership, attracted by the tax reliefs on offer, the preservation of company culture, and the ability to reward loyal employees. But what happens when, for whatever reason, EOT ownership is no longer the right fit?

It is a question we are asked frequently. While an EOT is designed to be a long-term ownership structure, circumstances do change. The management team may conclude that the business needs external investment to grow, that the EOT model is not delivering the cultural or commercial benefits originally envisaged, or that a strategic acquirer has emerged with an offer that is genuinely in the best interests of employees. In every case, the path out of an EOT demands careful thought, both commercially and from a tax perspective.

Why might an EOT no longer be suitable?

There is no single reason why businesses seek to exit EOT ownership. Common scenarios we encounter include situations where the company needs significant capital investment that cannot be funded from trading profits alone, or where the deferred consideration payments to outgoing shareholders are placing unsustainable pressure on cash flow. In other cases, the participatory culture that EOT ownership requires, with its emphasis on transparency, employee engagement, and shared decision-making, simply does not suit the way the business operates. Sometimes a trade buyer approaches with an acquisition proposal that would deliver better outcomes for employees than continued trust ownership, or simply that the business has evolved since the EOT was established, such that it is no longer a suitable ownership structure for the business.

Whatever the trigger, it is important to recognise that exiting an EOT is not a failure. The legislation does not prohibit it, and HMRC guidance acknowledges that circumstances may change. What matters is that the decision is made properly, for the right reasons, and with a full understanding of the consequences.

The tax implications: Where it gets complex

The tax position on an EOT exit is one of the most misunderstood areas of the regime, and getting it wrong can be extremely costly.

The base cost trap

When shares were originally sold to the EOT, the transaction was treated on a no gain, no loss basis for Capital Gains Tax (CGT) purposes. This means the EOT inherited the original shareholders' base cost; which, for many founder-owned businesses, is negligible. If the EOT subsequently sells those shares to a third party, the gain is calculated by reference to that original low base cost, not the price the EOT paid. A company acquired by its EOT for £5 million, where the founders' original base cost was nominal, will generate a gain of close to £5 million on a subsequent disposal. This is a point that catches many management teams off guard.