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Thinking of exiting your business in 2025? 10 pros and cons of selling to an Employee Ownership Trust

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Building a business takes dedication, commitment, and often, many years of hard work. So, exiting your business is a big decision.

You’ll no doubt want to do what’s right for your business and your people, as well as your personal finances and ambitions.

As such, it’s important to consider all your options carefully, so that you can make an informed decision about how to sell your company.

So, if you’re thinking about exiting your business in 2025, read on to learn more about selling to an Employee Ownership Trust (EOT) and discover 10 important pros and cons to consider.

An Employee Ownership Trust allows your business to be owned by its employees

An EOT is a type of internal sale that allows you to transfer ownership of your business to your employees.

As the owner of your company, you could set up an EOT as part of your exit strategy or succession plan. While you don’t have to relinquish all your shares in the business, the trust must hold a controlling interest – at least 51% of the shares.

These shares are then managed by the trustees of the EOT on behalf of your employees, who become indirect company owners.

The day-to-day operation of the business will continue to be managed by the senior leadership team. You could choose to remain significantly involved in the business or take a step back.

10 pros and cons of Employee Ownership Trusts

Pros

If you’re considering an internal sale, selling to an EOT could offer several benefits.

  1. Capital Gains Tax (CGT) exemption – You can usually sell shares to an EOT at their full market value without having to pay CGT, provided that the qualifying conditions are met.
  2. Inheritance Tax (IHT) planning opportunities – Shares held by an EOT are not considered part of a seller’s estate for IHT purposes. So, the EOT structure could allow you to pass on wealth to future generations tax-efficiently.
  3. A smooth transition – Selling to people who already know your business inside out may be less stressful than searching for a suitable external buyer. This could be beneficial for all parties involved – the seller, the team, and crucially, your clients or customers.
  4. The option to retain an interest in the business – The EOT only needs a controlling interest in your business, so you could opt to retain some shares and remain as a director or employee. This would allow you to stay involved in the business and, potentially, to continue receiving an income and bonuses.
  5. Tax-efficient employee bonuses – Under an EOT structure, each eligible employee can receive up to £3,600 of Income Tax-free bonuses each year. The business can also claim Corporation Tax exemption on these bonuses. What’s more, the Autumn Budget gave businesses greater flexibility to tailor these bonuses to their needs by allowing for the exclusion of directors.

Cons

An EOT may sound like an attractive route to sale, but there are some potential drawbacks worth considering.

  1. Delayed payment – Typically, an EOT pays for its controlling shares in a business over time from the company’s profits. This deferred payment could delay your plans for the future. For example, if you want to reinvest the proceeds in a new business, you may be unable to do so until the EOT has paid the full sale price for your shares.
  2. Not all sales qualify for CGT relief – In her Autumn Budget, the chancellor tightened the qualifying criteria for CGT relief when selling to an EOT. For example, EOT trustees must now be UK residents at the time of disposal, and former owners (and people connected to them) can’t make up more than half of the trustee board and they cannot control the trust.
  3. Risk of having to repay CGT relief – Any CGT relief you receive at the point of sale could be recovered if the business is later sold or you breach the terms of the EOT within the “vendor clawback period”. The government extended this clawback period from one to four years in the Autumn Budget.
  4. Operational complexities – If you want to stay involved in your business after selling a controlling share to the EOT, you may need to adjust to having less decision-making freedom than you’re used to. Additionally, shared ownership and the involvement of trustees could mean that reaching an agreement on key decisions is more complicated and takes longer, making it more difficult to achieve the desired business growth.
  5. Complex process – An EOT transaction can be more complex than other routes to sale. This could affect the time and costs of the sale process.

As you can see, there is plenty to think about if you’re considering selling your company to an EOT in 2025.

Get in touch

If you’re preparing to exit your business in 2025 but you’re not sure where to begin, speak to the experienced financial planners at Sovereign. We have extensive experience supporting business owners and can help you craft a plan that helps you achieve your professional and personal goals.

To find out more, please get in touch. Email hello@sovereign-ifa.co.uk or call us on 01454 416653.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

All information is correct at the time of writing and is subject to change in the future.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The Financial Conduct Authority does not regulate estate planning or tax planning.

Approved by Best Practice IFA Group 15/01/2025

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