For a generation of business owners approaching retirement, selling to an employee ownership trust looked like the perfect exit.
The business passed to the people who built it, the founder walked away with a tax-free gain, and everyone involved could feel good about the outcome. Now the picture is more complicated.
Employee ownership trusts were introduced in 2014, modelled on the John Lewis partnership and designed to encourage a form of succession that kept businesses intact and employees invested in their success. The tax incentive was generous: sellers who transferred a controlling stake to an EOT paid no capital gains tax on the proceeds. Over the following decade, the number of EOTs grew from a few hundred to around 2,500, with well-known names including Go Ape, Richer Sounds and The Entertainer among them.
The surge in popularity, applications jumped 40 per cent in 2023-24 alone, with the number of people declaring an EOT sale on their tax return rising 149 per cent, attracted the attention of the Treasury. Ministers became concerned that the relief was being exploited, particularly through offshore structures where EOT trustees would quickly resell the business to another buyer, allowing the original owner to pocket the proceeds entirely tax-free without any meaningful transfer of ownership to employees.
The government’s response has been a crackdown. New rules ban offshore EOT structures and introduce a four-year clawback clause, meaning sellers could lose their capital gains tax exemption if the business is sold on within four full tax years, up from just one previously. The effect has been swift: the Employee Ownership Association reports that EOT sales fell from 550 in 2024 to an expected 350 in 2025, a drop of more than a third.
For the small business owner who was genuinely considering employee ownership as a succession route, not as a tax dodge but as a way of securing the future of the business and rewarding loyal staff, the tightened rules are frustrating but not fatal. The core tax benefit remains intact for genuine transfers. The CGT exemption still applies where the sale is a bona fide transfer of control to employees with the intention of maintaining the business as an employee-owned entity.
What has changed is the level of scrutiny and the consequences of getting it wrong. Advisers report that sellers are now being more carefully questioned about their intentions, that the four-year clawback clause requires a longer-term commitment to the EOT structure, and that the professional fees involved in setting up a compliant trust have risen.
For small business owners exploring their exit options, the message is that employee ownership remains a viable and attractive route, but it is no longer the quick, clean, tax-free transaction that it appeared to be two years ago. Professional advice is essential, the timeline is longer, and the commitment must be genuine. Businesses that approach it on those terms will still find the model works. Those looking for a shortcut will find the door has closed.
