It’s the law: Employee ownership trusts: When the business you rely on changes hands
In this edition of ‘It’s the law’ we look at employee ownership trusts: what they are, why so many contractors and consultants are choosing them, and what to check when a business you rely on is sold to one. We finish with the other ownership structures to watch for, and whether the trust idea has a place in estate management.
“A sale to an employee ownership trust is often very good news for a business and its people. But the price is usually paid out of future profits, so anyone relying on that business should understand where the cash is going and who now stands behind the contract.”
Joanna Bouloux
Partner
Authors
Joanna Bouloux
Partner
Helen Curtis
Partner
Andrew Cromb
Partner
More and more of the businesses our clients rely on, from main contractors to consultants and maintenance firms, are becoming employee owned. When a contractor writes to say that its owners have sold to an employee ownership trust and that it is ‘business as usual’, that is generally true on site. But the ownership, funding and governance of the business have all changed, and that matters to anyone relying on its balance sheet. What follows is our plain English take on:
- What an employee ownership trust is, and why owners choose one.
- How the purchase is usually paid for, and what that does to the business.
- Covenant strength, guarantees and change of control clauses.
- Credit checks, and the other ownership structures to watch for.
- What to think about if you are considering an EOT for your own business.
- Whether the trust idea could help with estate and residents’ management companies.
What is it?
An employee ownership trust (EOT) is a trust that holds a controlling interest in a trading company for the benefit of all of the company’s employees. The owners sell at least a majority of their shares to the trustee, usually a company set up for the purpose, whose board will typically include an independent trustee and an employee representative.
The employees do not normally own shares themselves. The trust holds the shares for them, and they share in the company’s success through the trust, most often by way of annual bonuses. The John Lewis Partnership is the best known example of a business owned in trust for its staff, although its structure long predates the current tax regime, which was introduced by the Finance Act 2014 and sits in sections 236H to 236U of the Taxation of Chargeable Gains Act 1992.
Why now?
For owners, an EOT is a route to succession without a trade sale. The business keeps its name, its independence and its people, and the owners agree a price with a trustee rather than negotiate with a competitor. There are tax advantages too:
- Capital gains tax relief on the sale. For sales before 26 November 2025, the whole gain on a qualifying sale was exempt. For sales on or after that date, half of the gain is exempt and half is taxed at the main rate of 24%, an effective rate of 12%. Business asset disposal relief cannot be claimed on top.
- Tax-free bonuses. Once the trust is in place, the company can pay each employee bonuses of up to £3,600 a year free of income tax (national insurance still applies), provided they are paid to all eligible employees on the same terms.
Numbers have grown quickly. The Employee Ownership Association counted 2,925 employee owned businesses in the UK in September 2026. Construction has been the fastest growing sector for employee ownership, and by mid 2025 accounted for around 14% of all employee owned businesses. If you procure building work, consultancy or maintenance, you are almost certainly contracting with some of them already.
Rules of the game
To qualify for the reliefs, the structure must meet a set of conditions at the time of the sale and afterwards:
- Trading: the company must be a trading company or the holding company of a trading group. Investment businesses do not qualify.
- Control: the trustee must acquire, and keep, a controlling interest: more than half of the ordinary shares, votes, profits and assets on a winding up.
- All employees: the trust must benefit all eligible employees on the same terms, although benefits can vary by pay, hours worked or length of service.
- Limited participation: shareholders with 5% or more who work in the business, and employees connected with them, must not make up more than 40% of the workforce.
- Independence: since 30 October 2024, the former owners and people connected with them must not control the trustee (they must hold less than half of the seats on the trustee board), and the trustees must be UK resident.
- Fair price: the trustees must take reasonable steps to ensure that they pay no more than market value, and that any interest on deferred consideration is at no more than a reasonable commercial rate.
If the conditions are broken before the end of the fourth tax year after the tax year of the sale, the former owners can lose their relief. That gives them a continuing interest in how the company is run, even after they have stepped back.
Show me the money
Very few EOT purchases are paid for in full on day one. The trustee has no money of its own, so the price is funded by the company itself. The usual pattern is:
- An initial payment to the former owners out of the company’s cash reserves, which the company contributes to the trustee.
- Sometimes, a further amount funded by bank borrowing, often secured on the company’s assets.
- The balance left outstanding as deferred consideration, owed by the trustee to the former owners and paid over several years out of contributions from the company’s future profits.
So a profitable, cash rich business can come out of the sale with less cash, perhaps with new bank debt, and with much of its future profit earmarked for its former owners for some years. Repayment depends on the business continuing to trade well. The former owners will often have protections of their own while they are owed money, such as security and restrictions on what the company can do.
Business as usual?
On site, it usually is. The company that signed your contract is the same company, so there is no assignment or novation, and the directors and project teams normally stay in place. What changes is above and behind the company:
- The shareholder is now a trustee, whose job is to hold the shares for the employees, not to put more money in.
- The former owners have become creditors rather than owners, and may step back from the business over time.
- Cash flow is committed to paying for the business for some years.
- There is a new layer of governance, with the trustee board overseeing the company board.
None of this means that an employee owned business is a weaker counterparty. Many are well run and well capitalised, and an EOT can protect a business’s long-term independence. But the covenant you assessed before the sale may not be the covenant you have now.
“The site team rarely changes when a business is sold to its employees. What changes is in the boardroom and on the balance sheet, and that is where clients should be asking their questions.”
Jonathan Corris
Partner, Head of Real Estate & Projects
Who’s got your back?
Where you rely on a contractor, developer or partner’s financial strength, take a fresh look after an EOT sale:
- Accounts. The last accounts filed before the sale will not show the new position. If the contract value justifies it, ask for current management accounts and cash flow forecasts.
- Deferred consideration. Ask how much is still owed to the former owners, over what period, and whether the company has guaranteed that debt or given security for it.
- Bank debt. Check the charges register at Companies House for new charges over the company’s assets.
- Personal guarantees. If a former owner gave a personal guarantee, check whether it survives the sale and whether the guarantor can still stand behind it.
- Shareholder and parent guarantees. A guarantee from the EOT trustee will rarely add much: its only real asset is usually the shares, and any money it receives is earmarked for the former owners. If the contracting company sits within a group, look for a guarantee from a group company with real substance.
- Other protection. Performance bonds, retentions, step-in rights and collateral warranties may matter more than they did, so check they are in place and still valid.
Same name, new owner
A sale to an EOT is almost always a change of control, because the trustee acquires more than half of the shares. Check whether any of your documents give you rights when that happens:
- Building contracts and appointments. The standard forms do not usually include a change of control right, but bespoke amendments often do.
- Development agreements and land deals, particularly where you chose the developer for its track record and financial standing.
- Joint venture and partnering agreements, which often treat a change of control as a default event or give the other party a right to buy out the defaulting party’s interest.
- Frameworks and call-off contracts.
- Leases. Most do not restrict a change of control of the tenant, but some do, and the landlord’s view of the tenant’s covenant may change in any event.
If a right is triggered, decide what you want: to consent, to waive the right in return for comfort (fresh guarantees, information undertakings or a bond) or, rarely, to exit. Rights of this kind can be lost if you carry on regardless without reserving your position, so take advice promptly.
Check, check and check again
Credit checks should not be a box ticked once at tender stage. A sensible routine for contractors, developers and partners is to check:
- At selection and again before contract award.
- Whenever you learn of a change of ownership, a restructuring or the departure of key people.
- Before a significant new commitment, such as a framework appointment, a new phase or a large call-off.
- At key points in the contract, such as before releasing retention or a large payment.
Useful sources include Companies House (filed accounts, the charges register and the register of people with significant control, which should now show the EOT trustee), credit reference agencies and the counterparty itself. A business that has just become employee owned should be happy to explain how the purchase was funded and what it means for its balance sheet.
Not the only game in town
EOTs are only one way in which the ownership of a business you rely on can change. Others to look out for:
- Private equity. Often good for growth, but frequently funded with debt elsewhere in the group, with profits flowing up to service it.
- Management buyouts. The management team buys the business, usually with bank or vendor finance, which has a similar effect on cash to an EOT.
- Overseas parents. The real financial strength may sit outside the UK, so check where any guarantor is based and whether a guarantee could be enforced against it.
- Group restructures. A hive-up or hive-down can leave the contracting company with few assets while the trade moves elsewhere in the group.
- Special purpose vehicles. Common in development and joint ventures. An SPV’s covenant is only as good as the guarantees and security around it.
- Other employee owned models. Direct share ownership, employee benefit trusts and co-operatives raise similar questions.
The questions are the same each time: who owns the business now, where is the money, and who stands behind the contract?
Thinking of it yourself?
Many of our developer, contractor and consultant clients are owner managed businesses. If you are considering an EOT for your own business, the main questions are:
- Price. The trustees need an independent valuation and must not overpay.
- Funding. How much can the business afford to pay out of profits, over what period, and will your lenders consent?
- Governance. Who will sit on the trustee board, and how will the company board be held to account?
- Contracts and property. The change of control clauses in your own contracts, frameworks, leases and finance documents (the list above, seen from the other side), and the property your business owns or occupies.
- Tax. The CGT relief is now half what it was. The Autumn Budget 2026 also halves the lifetime limit for business asset disposal relief to £500,000 from 6 April 2027 and proposes a new, narrowly targeted founders’ relief, so compare the options with your tax advisers before you decide. Looking ahead, a future sale by the EOT triggers both corporation tax at the EOT level and then a further tax charge on distribution to employees.
- People. Employees need to understand what they are getting, and what they are not.
Our corporate, banking, tax and real estate teams can work together on an EOT transaction, from the share sale and the trust deed to the funding arrangements and the property aspects.
Bonus point: what about management companies?
Could a trust of this kind help with estate or residents’ management companies? Not in the EOT form. The EOT rules are a tax relief for owners selling a trading company for the benefit of its employees. Most estate and residents’ management companies are not for profit, are owned by the residents (or by the developer until handover) and have no employees of their own, so the relief has nothing to bite on.
The idea behind it does translate, though: a company owned through a trust, with independent trustees and a duty to a defined group of beneficiaries, designed to protect its long-term purpose. Variations on that model are already used for estate stewardship, through charitable trusts, community land trusts and community interest companies that own and look after open space and community facilities. With further protections for homeowners on freehold estates on the way, and commonhold proposed as the default tenure for new flats under the draft Commonhold and Leasehold Reform Bill, developers and RPs will need to think harder about who owns and runs the bodies that manage their schemes. The ownership model is worth settling early, not at handover.
And one more thing: the managing agents and maintenance contractors that serve those management companies are trading businesses too and may themselves become employee owned. The checks above apply to them as well.
Find out more
Want to find out more? Get in touch. We would be happy to talk through a counterparty that has changed hands, the protections in your contracts, or an EOT for your own business.
This document is part of Devonshires’ ‘It's the law’ series, tailored for people working in development and regeneration. All reasonable precautions have been taken to ensure that the information contained is materially accurate. However, this document is not intended to be legally comprehensive, and no action should be taken on the matters covered without seeking specific legal advice.
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Devonshires Solicitors LLP 30 Finsbury Circus London EC2M 7DT
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