Succession planning remains one of the most critical decisions for owners of law firms, particularly those seeking to preserve their firm’s legacy, values, and workforce. As traditional exit routes face increasing tax burdens and external sale risks, Employee Ownership Trusts (EOTs) have emerged as a compelling alternative—offering a blend of financial efficiency, cultural continuity, and long-term stability.
What is an Employee Ownership Trust?
An EOT is a legal structure that enables a company to be owned indirectly by its employees. Introduced in the UK in 2014, EOTs allow business owners to sell a controlling interest (at least 51%) to a trust that holds the shares on behalf of all employees. Unlike a direct shareholding, employees do not own shares individually but can benefit collectively via the trust.
Key Benefits of EOTs
Capital Gains Tax (CGT) Exemption:
One of the most attractive features of EOTs is the complete exemption from CGT when a company owner sells a controlling interest to the trust. With increases to CGT rates from April 2026 (from 14%/24% to 18%/24%), traditional sale routes have become more expensive, making EOTs a more attractive option for the right company.
Tax-free employee bonuses:
Employees can receive annual bonuses of up to £3,600 tax-free, boosting morale and reinforcing the sense of shared success. While these bonuses are exempt from income tax, National Insurance contributions still apply.
Preservation of a firm’s culture and values:
Unlike external sales, which may lead to cultural disruption or strategic shifts, EOTs help maintain the founding ethos of the firm. This is particularly valuable for company owners who prioritise legacy and employee welfare over maximising sale price.
Enhanced employee engagement and retention:
EOTs foster a culture of inclusivity and shared responsibility. Employees, as beneficiaries of the trust, are more likely to be motivated, engaged, and committed to the company’s long-term success. This often translates into improved productivity and lower turnover rates.
Business stability and continuity:
By spreading ownership across the workforce, EOTs provide a stable foundation for future growth. They reduce the risk of disruptive ownership changes and ensure that strategic decisions align with the interests of those who contribute to the business daily.
Practical Considerations
Setting up an EOT typically takes three to six months and involves several key steps:
Incorporating the law firm (if not already structured as a limited company)
Obtaining approval from the SRA to operate as an Alternative Business Structure
Valuation: Determining the fair market value of the business
Trust formation: Establishing the legal framework
Agreeing the appropriate governance/operational structure for the law firm
Financing: Structuring the share purchase, often with deferred payments funded by future profits
Employee communication: Ensuring transparency and buy-in from staff
To qualify as an EOT, the company must be a trading entity, and the trust must benefit all employees equally. Additionally, the EOT must hold at least 51% of the company’s shares.
Is an EOT Right for Your Business?
EOTs are particularly suited to profitable law firms which have a strong internal culture, and a leadership team committed to the firm’s independence and long-term sustainability. They offer a flexible exit strategy – the current shareholders can choose to step back entirely or remain involved in a reduced capacity.
With tax policy changes on the horizon, now is an opportune time for law firm owners to explore EOTs. Beyond financial incentives, they offer a meaningful way to reward employees, safeguard the firm’s values, and ensure a smooth succession.
If you would like to learn more about how an EOT structure might work for your business and how we can assist your law firm throughout the whole transition process, please get in touch by emailing help@armstrongwatson.co.uk or calling 0808 144 5575 .
