Why Employee Ownership Trusts Remain a Strong Exit Strategy — Even After the Reduction in Capital Gains Relief.

For many SME owners, planning an exit is one of the most consequential decisions of their career. It affects not only the financial outcome for the vendor, but also the future culture, stability and long-term success of the business. While trade sales and private equity deals have historically dominated the landscape, the past few years have seen a significant rise in alternative ownership models, particularly Employee Ownership Trusts (EOTs). Even with the change in Capital Gains Tax (CGT) relief announced in the November 2025 Budget, an exit to an EOT can remain a compelling and cost-effective strategy for vendors, and a structurally positive approach to succession for employees.

SME owners typically consider four primary exit routes: a trade sale, a management buyout (MBO), a private equity (PE) sale, or a sale to an EOT. A trade sale may deliver a high upfront value because strategic buyers can justify paying for synergies. However, it also introduces the greatest likelihood of cultural disruption, changes to operating practices, and potential cost-cutting measures that may unsettle or displace employees. The vendor usually enjoys a clean break with a largely upfront cash payment, but this often comes at the expense of continuity and legacy.

By contrast, an MBO keeps the business in familiar hands. Management continuity is highly valued by lenders and staff, and the vendor often benefits from a smoother transition. Yet, MBOs are typically more constrained by the management team’s access to funding, meaning the valuation may be lower than in a trade sale, with the vendor sometimes required to provide vendor financing. For employees, an MBO offers stability but not necessarily broad-based participation in the business’s future growth.

A private equity sale sits somewhere in between. PE investors can offer a strong valuation and the promise of investment to scale the business. Vendors may retain equity and benefit from future value creation, although this usually comes with earn-out conditions and reduced control. Employees may experience accelerated growth opportunities, but could also see significant shifts in strategy commercial focus.

Selling to an Employee Ownership Trust presents a distinctly different proposition. The vendor sells their shares to a trust established for the benefit of all employees. Historically, this route has been especially attractive due to the availability of 100% CGT relief on qualifying disposals. Equally important is the ability to preserve the culture and values of the business and reward the employees who contributed to its success. Employees benefit through greater engagement, long-term alignment and a shared stake in the business’s future.

The November 2025 Budget, however, introduced a notable change: the CGT relief available to vendors selling to an EOT has been reduced from 100% to 50%. As a result, half of the gain will now be treated as a chargeable gain at the point of sale, with the remaining 50% continuing to be exempt (subject to certain clawback provisions). While this undeniably changes the financial calculus, it does not remove the overall attractiveness of the EOT model. In fact, for many vendors, a 50% CGT discount still represents a significant tax advantage relative to a traditional sale, especially when combined with the strategic and cultural benefits that employee ownership provides.

What is striking is that the popularity of EOTs had already been rising sharply before the Budget announcement. According to data from the Employee Ownership Association (EOA), the number of employee-owned businesses has grown to around 2,470 across the UK - more than double the number just a few years ago. In 2023 alone, firms transitioning to EOT ownership increased by over a quarter, reflecting a sustained trend. This momentum is expected to remain healthy, as the underlying motivations for EOT transitions remain as compelling as ever. Namely, succession, culture, employee retention and long-term stability. 

For vendors considering an EOT exit, careful preparation is essential. The first priority is ensuring the business has robust management information (MI) and consistent financial reporting. Because EOT transactions are typically financed through a combination of external debt and vendor loans, lenders will scrutinise the quality of earnings, cash conversion, and the stability of trading performance. Strong MI gives confidence that the business can support the financing structure required for the Trust to buy out the vendor.

Funding the transition itself warrants serious planning. Unlike a trade or PE sale where cash is delivered at completion, an EOT deal often involves staged payments funded by the ongoing profitability of the business. This means both the vendor and the lender must be comfortable that the business can sustain debt while continuing to invest appropriately for growth. Ensuring sufficient headroom and avoiding over-leverage is crucial.

Management continuity is another vital element. Particularly where a founder is stepping back either immediately or over time, lenders and trustees alike need confidence that key individuals will remain committed to the business’s long-term success. Retention mechanisms, including incentives within the EOT framework, play a vital role in keeping senior leaders motivated and aligned.

Finally, the post-transaction governance and operational model must be clearly defined. An EOT does not involve employees voting on day-to-day decisions; instead, it introduces a trustee board, an employee council or similar structure to represent staff and uphold the trust’s principles. A clear operational plan helps ensure a smooth adjustment to the new ownership structure and supports continued commercial discipline.

In conclusion, although the CGT benefits for vendors transitioning to an EOT have been reduced, the model remains an attractive and effective exit strategy. It continues to offer a meaningful tax advantage, preserves the culture and identity of the business and rewards the employees who helped build it. For vendors focussed on legacy, an EOT continues to represent a powerful and balanced succession approach.

Shawbrook understands the nuances involved in employee ownership transitions. As highlighted on our website, we have extensive experience supporting EOTs through both the initial transition funding and ongoing financing needs - whether enabling the trust to acquire further share capital or providing debt capital to support future growth. Our specialist approach avoids a rigid, formulaic mindset and instead focuses on structuring tailored funding solutions that reflect the unique requirements of each transaction. This flexibility is often what makes an EOT transition not only possible but successful over the long term.