Employee Ownership Trusts (EOTs) – where are we now in 2026?

We are now nearly two months into 2026 and we thought it would be a good time to review the position for EOTs after the changes in the last 18 months including restricting the ability of sellers to control the EOT, requiring EOT trustees to take care over the valuation of the shares and tax changes.

The tax changes are important and include:

• Increasing the period for the clawback of the tax relief on a sale to an EOT from one year to four years (plus the remainder of the tax year in which the EOT obtained control of the company) for transitions on or after 30 October 2024
• Limiting tax relief on the sale of shares to an EOT to 50% (rather than a tax-free sale), so an effective tax charge of 12% capital gains tax for transitions on or after 30 November 2025
• Creating a requirement to claim corporation tax relief on contributions from the trading company to the EOT for, primarily, the purchase price, deferred consideration and transaction costs. All other payments made to the EOT can be treated as dividend to the EOT and subject to tax in the hands of the EOT.

Impact on transitions

By all accounts, there has been a marked reduction in the number of transitions to EO. The reduction in tax relief from 30 November 2025 concentrated minds of sellers. However, transitions that were “in the pipeline” have continued as sellers recognise that a 12% tax rate is still more attractive than a tax rate at 14% or 18% on the first £1m if Business Asset Disposal Relief was available or 24% that would apply on a trade sale.

The longer tax clawback period when combined with the tax relief reduction has made sellers think long and hard about whether EO is the right course of action, particularly with the increased costs of employing staff (NIC and National Minimum Wages increases) and general economic headwinds. With an EOT sale, a large proportion of the consideration is usually left outstanding to be paid from future profits, so the sellers are dependent on the business continuing to be successful. Transitions will now happen for the right reasons – protection of the business legacy, rewarding staff and maintaining local jobs, with the tax savings being a “nice to have” rather than the primary motivator. The change in mindset is probably a good thing for the long-term strength of the EO sector.

Post transition

If attendance at the last two EOT Roundtable events in our Cardiff office is anything to go by, EOTs are concentrating on succession, both at the trading company level and the trustee board and leveraging the EO advantage through their culture and business values.

Founders who have stayed on to run the business recognise that they need to find the next generation to run the business particularly if they want to retire in the next five years after being paid the deferred consideration. Succession should be on the risk register of all EOT trustee boards no matter what the age of the current leadership team.

Businesses want to maximise the benefit of being employee owned, whether that is through encouraging staff to think and act like owners (and be rewarded for their efforts through the income tax free EOT bonus) or show clients and customers the benefit of using an EO business through better service and customer experiences. Employee engagement and a cultural change can take time and money – it can be difficult and requires commitment from the management team down to the shop floor. However, some messages can be very simple such as “look after the company kit as you now own the company”. One EO company client reduced their purchase of battery powered drills/drivers from 80 to 13 per year and shared the saving with the staff via the EOT bonus. For Midlands based EOTs, we have a Roundtable event on EO and Culture in Nottingham on 21 May.

EO headwinds

We are seeing an increasing number of enquiries from trustees and directors of trading companies regarding the ability to pay the deferred consideration and questioning the original valuation and the affordability of the transaction. There are a number of competing factors to consider:

• Trustees have a duty to their beneficiaries (the employees) not to overpay for the shares. Does what they are being asked to pay reflect the value of the shares?
• The sellers face a risk of a potential income tax charge on selling the shares for more than their market value with the employing company facing a NIC charge on the income tax liability (which is payable via PAYE).
• The sellers agreeing to forgo a part of the purchase price could face an inheritance tax charge if there was an intention to provide a gratuitous benefit from the reduction.

All parties need to tread very carefully.

If the trading company becomes insolvent and the insolvency event is relatively close to the EOT transition, we have seen liquidators questioning the directors of the company that decided to approve the transfer of the shares regarding their decision making and whether the EOT transition was in the best interests of the company. The directors who were also the sellers (and received the consideration) are most at risk in this scenario.

What next for EO?

The stated aim of Employee Ownership Association to achieve 7,500 employee-owned businesses in the next five years (and a stretch target of 10,000 employee-owned businesses) may be optimistic given there are currently around 2,500 EOT owned businesses. The decrease in the value of Business Asset Disposal Relief to a tax saving of £60,000 from 6 April 2026 may result in an uptick in interest in EO transitions. However, transitions must be entered into for the right reasons. We are seeing valuers concentrating on affordability rather than the headline value when preparing a valuation for the EOT trustees to ensure that the EOT trustees satisfy their legal duty not to pay more than market value for the shares. 2026 will probably see a “taking of a breath” and consolidation of EO culture. Successful EO businesses may look to acquire weaker competitors (a tax-free merger of EOTs is possible) or acquire non-EO businesses.

One thing is certain, advising on all things EO continues to be “interesting” with a wide variety of work. It is sometimes difficult and challenging but that is what makes advising in the EO sector so rewarding.

If readers would like to hear from a wide range of speakers on EO topics in one place in 2026, registration for the Wales Employee Ownership conference in Cardiff on 11 June is now open.