Do EOTs Have a Future in UK Professional Services?

Employee Ownership Trusts emerged as an attractive succession model for UK professional services firms - but the Chancellor's Autumn Budget has changed the financial calculus that drove much of their adoption

Employee Ownership Trusts (EOTs) have emerged over the past decade as a new and attractive succession model among firms in the UK, enabling owners to transfer a controlling stake in their business to a trust that holds shares collectively on behalf of employees. Originally introduced to promote long-term ownership, the model gained momentum primarily because it offered a practical and tax-efficient solution to a persistent succession challenge - especially in people-heavy service firms.

That momentum has now reached a turning point. The Chancellor's Autumn Budget decision to reduce capital gains tax relief on EOT sales from 100% to 50% changes the financial calculus that drove much of the model's adoption. As fiscal policy tightens, EOTs move from being an attractive option to one that requires closer scrutiny alongside trade sales, private equity, and internal partner buyouts.

The scale of adoption under the tax-efficient regime highlights why this matters. In 2024 alone, 681 new EOTs were established - a 25% increase from 543 in 2023 - bringing the total number of employee-owned businesses in the UK to approximately 2,470, employing around 358,000 people. Professional services firms accounted for nearly 40% of these transitions, with architecture and engineering consultancies showing the strongest uptake, followed by management consulting and accountancy as consolidation pressures intensified. In these sectors, EOTs were rarely adopted as a statement of participatory management ideals; rather, they addressed the absence of natural buyers, the desire to preserve independence, and the need for orderly partner exits.

For the UK professional and business services (PBS) sector in particular, this reassessment is consequential. These firms derive value primarily from human capital, client relationships, and institutional knowledge - which are difficult to monetise through conventional sales without cultural or operational disruption. EOTs aligned closely with these realities, but their appeal was inseparable from the tax relief that underpinned them. As that relief is scaled back, firms must now evaluate whether the model still supports succession, retention, and long-term competitiveness under less favourable financial conditions.

The central question is no longer whether EOTs work in theory, but whether they continue to represent a commercially rational succession strategy in a more constrained fiscal environment.

What Are Employee Ownership Trusts?

Simply explained, an EOT model allows the owners of a company to sell a controlling stake (at least 51%) to a trust that holds the shares on behalf of all employees. Employees do not buy shares directly - instead, ownership is held collectively, and the company continues to be managed by its leadership team.

The model draws intellectual inspiration from the retailer John Lewis, which has operated under trust-based employee ownership since 1929. However, the EOT framework introduced in 2014 was not designed to replicate the John Lewis model in totality. Instead, it translated the underlying principle of collective, trust-based ownership into a standardised legal and tax structure capable of supporting succession in SMEs and professional services firms. In that sense, EOTs represent the codification of a long-standing British ownership tradition, adapted to contemporary succession and capital constraints.

What Has Changed and Why the Government Acted

In the Chancellor's Autumn Budget, the government announced a significant change: CGT relief on sales to EOTs was reduced from 100% to 50%. This means that half of any capital gain is now taxable, resulting in an effective CGT rate of around 12%, rather than 0%.

The government's stated rationale was fiscal. When EOT legislation was introduced, the expected cost to the Exchequer was relatively modest. However, uptake far exceeded early forecasts. Initial projections had estimated annual costs below £100m - but by 2021/22, the figure reached £600m, with forecasts estimating a nearly £2bn cost to be incurred by 2028/29.

The Role of Tax Relief and Why It Mattered

The success of the EOT model hinged on the tax framework that supported it. Under the original legislation, shareholders selling a controlling stake to an EOT paid no Capital Gains Tax on the sale. This 100% relief made EOTs financially competitive with mergers and acquisitions - and arguably more attractive. For professional services firms, this mattered for three reasons.

First, it made deferred exits viable. Most EOT transactions are funded over time, using the future profits of the business. Without tax relief, sellers could face a significant tax bill before they had received sufficient cash from the transaction. Second, EOTs offered a structured internal alternative where ownership remained in-house and the firm's leadership continued uninterrupted - preferred over a rushed sale in cases of succession crisis.

The new effective CGT rate of around 12% changes that dynamic: exiting partners can now incur a tax liability as soon as the EOT transaction completes, even though much of their consideration will only be received years later through deferred payments. This brings forward the tax burden relative to the cash actually received, tightening personal cashflow and making EOT-funded buyouts less attractive than before. For many existing businesses - especially those that had been weighing EOTs primarily for their tax efficiency - this added friction reduces the appeal of the model and may push them back toward traditional partner buyouts, external sales, or simply postponing succession decisions.

What This Means for UK Professional Services

While EOTs were initially viewed as a niche model, they quickly gained traction in professional services - particularly in architecture, engineering, consulting and accountancy. These firms were well suited for this model: they were people-led rather than asset-heavy, driven by long-term client relationships, and largely owned by partners who would retire leaving questions over succession. These sector-specific factors narrowed down traditional succession routes like partner buy-ins, which required junior partners to take on personal debt to finance their stake.

Alternatives such as trade sales and mergers involve selling the firm's entire business to another firm and risk undermining the unique character and culture that clients and high-performance employees have come to expect. Through EOTs, founding partners or senior partners could exit the firm and receive their payouts over a deferred period funded by future profits and guaranteed by legal contractual obligations - while the firm continued to maintain its independence and employee-aligned ownership.

The Place for EOTs in Professional Services Going Forward

Even with CGT relief halved, Employee Ownership Trusts will endure as a tailored succession route for smaller and mid-sized professional services firms - boutique architecture studios, regional engineering consultancies, or specialist advisory practices - that place a premium on independence, cultural continuity, and long-term client relations over aggressive scaling. These firms, often 20-100 strong and rooted in niche expertise, derive real value from EOTs' intrinsic strengths: fostering employee retention through shared ownership, preserving decision-making autonomy free from private equity timelines, and ensuring seamless knowledge transfer without the disruption of external buyouts.

Tax efficiency was the spark, but for those committed to these principles, the model delivers enduring alignment that justifies the new economic trade-offs.

The tax benefit may no longer be decisive on its own, but it has not disappeared. When combined with the operational upside of employee alignment, talent retention, and cultural stability, the EOT remains a credible and attractive model for founders and founding teams who run established businesses, value long-term cultural planning, but haven't ruled out a traditional exit to a strategic buyer in the mid-term.