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.

The clawback period

The timing of the exit is critical. If the EOT ceases to hold a controlling interest in the company before the end of the clawback period, the CGT relief granted to the former shareholders is clawed back entirely, and the original vendors become liable for CGT on their initial sale as though the relief had never applied. Where deferred consideration is still outstanding, this can create a deeply uncomfortable situation for all parties.

Post-clawback exits

If the exit takes place after the clawback period has expired, the original shareholders' relief is preserved. Instead, the EOT trustees become liable for CGT on the disposal of the shares. Given the low inherited base cost, this liability can be substantial and must be funded, typically from the sale proceeds.

Distributions from the EOT

Any excess proceeds remaining after payment of any outstanding deferred consideration would need to be distributed to employees in accordance with the trust deed. PAYE would need to be accounted for on these distributions.

The 2025 Budget changes

The landscape shifted further in the Autumn Budget 2025, when the Government reduced the CGT relief on disposals to EOTs from 100% to 50%, effective from 26 November 2025. While this change principally affects new transactions rather than existing EOTs, it alters the economics of any restructuring that involves a further share disposal. It also underlines the direction of travel: the Government is tightening the regime, making it more important than ever to take professional advice before acting.

Commercial considerations

Beyond tax, an EOT exit raises a series of commercial and governance questions that the management team and trustees must work through together.

The trustees have a fiduciary duty to act in the best interests of the beneficiaries (the employees). Any decision to sell the company out of the EOT must be demonstrably in their interests, not merely convenient for the management team or a prospective buyer. Independent valuation advice is essential, and the trustees will typically need their own legal counsel. Read our article on why independent valuations are crucial for EOTs.

There are also practical questions around the mechanics of the transaction. How and to whom will the sale proceeds be distributed? What happens to any outstanding deferred consideration owed to the original vendors? How will the transition be communicated to employees who may have a strong emotional attachment to the ownership model? If there are large distributions from the EOT to employees and the management team, what impact would this have on the business going forwards?

Getting the governance right is not optional. HMRC has increased its scrutiny of EOT transactions in recent years, and a poorly structured exit could attract unwelcome attention, particularly if there is any suggestion that the EOT was established with the intention of a subsequent reversal.

How we can help

We work with privately held businesses and their management teams across the full lifecycle of EOT ownership — from initial structuring through to ongoing compliance and, where necessary, exit planning.

Our corporate tax and advisory teams can help management teams and trustees understand the full tax cost of an exit, model different scenarios and timelines to optimise the position, navigate the clawback rules and identify the most appropriate window for a disposal, coordinate with legal advisers on the structuring of any sale transaction, advise on the treatment of deferred consideration and its interaction with the CGT position, and ensure that the governance and reporting obligations are met throughout the process.

We also work closely with the trustees' own advisers to ensure that the interests of all stakeholders, including employees, management, and former shareholders, are properly balanced.

If your business is in an EOT and you are beginning to question whether it remains the right structure, or if you are a trustee navigating a potential exit, get in touch by filling out the form below. The earlier professional advice is taken, the more options are likely to be available.