Understanding the Role of Trustee Directors in Employee Ownership Trusts (EOTs)

By EotOwl – Your specialists in Employee Ownership Trusts

Employee Ownership Trusts (EOTs) continue to grow in popularity as more business owners look for succession options that protect their legacy, reward their employees, and maintain long-term business stability. But while much of the focus tends to fall on the tax benefits or the sale process itself, one crucial area often overlooked is how the trust is actually run—and, more importantly, the responsibilities of those who run it.

At the heart of every EOT sits its trustees. Most EOTs choose to appoint a corporate trustee (a Trust Company) rather than individual trustees, mainly because it simplifies administration. Directors can be appointed or retired easily, avoiding the need for formal deeds of adherence or retirement. This corporate trustee acts through its directors, known as Trustee Directors, who play a vital oversight role in ensuring the EOT structure remains compliant, fair and effective.

At EotOwl, we guide business owners, trustees and employees through the responsibilities that Trustee Directors must navigate. This blog breaks down those duties in a clear and practical way.

1. Trustee Directors and Their Legal Duties

Trustee Directors must comply with the same statutory duties imposed on all company directors under the Companies Act 2006, as well as additional trust-specific obligations.

The Seven Statutory Directors’ Duties (CA 2006)

Every Trustee Director must:

These duties apply to all decisions made in their role as directors of the Trust Company.

2. Additional Responsibilities Specific to EOTs

EOTs bring a unique set of obligations on top of general director duties.

a. Duty to Employee Beneficiaries

Trustee Directors must ensure the EOT operates solely for the benefit of eligible employees. Decisions must be impartial and consistent, except where variations are permitted in the Trust Deed.

b. Compliance With the Trust Deed

The Trust Deed is the governing document of the EOT. Trustee Directors must fully understand and follow it, referring back to it regularly when making decisions.

c. Oversight – Not Management – of the Trading Company

While the trading company’s board manages day-to-day operations, Trustee Directors are responsible for:

• Monitoring performance
• Challenging and supporting the board
• Ensuring the company is run for the long-term benefit of employees

This oversight normally occurs through regular reports from the trading company’s directors.

3. Protecting the Tax Advantages of an EOT

The Government introduced the EOT tax regime in 2014 to encourage more employee-owned businesses. Maintaining these benefits is vital, and Trustee Directors must ensure ongoing compliance.

Key EOT Tax Reliefs

a. Income Tax-Free Bonus

Employees can receive a bonus of up to £3,600 per tax year free of income tax, provided it is paid on the same terms to all eligible employees. (National Insurance contributions still apply.)

b. Capital Gains Tax (CGT) Exemption

Selling shareholders may benefit from a full CGT exemption when selling a controlling interest to an EOT. Importantly, this applies only in the tax year control is first obtained.

4. CGT Relief – Qualifying Conditions Trustee Directors Must Maintain

To preserve the CGT exemption, the following conditions must be met at the point of sale and on an ongoing basis:

1.Trading Requirement

The company must be a trading company or the holding company of a trading group.

2. All-Employee Benefit Requirement

Trust assets must benefit all eligible employees on the same terms, except those with (or connected to those with) 5%+ shareholdings in the previous 10 years.

Permitted variations can reference:

• Length of service
• Hours worked
• Remuneration

3. Controlling Interest Requirement

The EOT must acquire and retain more than 50% of the company’s shares and voting rights.

4. Limited Participation Requirement

No more than 40% of employees may be “participators”—typically individuals with significant prior shareholdings or their connected persons.

5. Residence Requirement

Trustees or Trustee Directors must be UK-resident at transfer and thereafter.

6. Independence Requirement

More than 50% of trustees/Trustee Directors must be independent of the selling shareholders (participators).

7. Market Value Requirement

Trustee Directors must take reasonable steps to ensure the purchase price does not exceed market value.

What Happens If the Conditions Are Breached?

A breach becomes a disqualifying event, which can have serious consequences:

• Within four tax years of the sale:
  The selling shareholder loses CGT relief and becomes liable for the tax.
• After four tax years:
  The trustees are deemed to dispose of and reacquire shares at market value, triggering a potential CGT charge.

Trustee Directors must therefore actively monitor compliance to safeguard the trust and its beneficiaries.

5. The Importance of Professional Advice

Trustee Directors are accountable for their decisions. Given the complexity of trust law, corporate governance, and tax requirements, it’s essential that they seek the support of:

• Specialist lawyers
• Experienced tax advisors
• Independent valuers

At EotOwl, we work with trustees throughout the lifecycle of the EOT to help them make informed, confident decisions while protecting the long-term success of the employee-owned company.

Employee Ownership Trusts (EOTs) provide a tax-efficient, employee-focused, and sustainable way to transfer ownership of a UK business. From substantial Capital Gains Tax relief for sellers to income tax-free bonuses for employees, the benefits are significant.

Whether you’re planning your exit, aiming to reward employees, or looking to preserve your company’s culture, an EOT can be a strategic, long-term solution. Please get in touch with the experts at EotOwl, who combine practical advice, and hands-on support to ensure every EOT transition is successful for both owners and employees.