EOT Funding: How the Trust Pays the Founder Out

An Employee Ownership Trust usually buys the company with no cash of its own. The seller is paid over time from the company's future post-tax profits, routed through the trust as deferred consideration. Payments depend on distributable reserves and must never exceed market value.

Selling to an Employee Ownership Trust (EOT) is straightforward to describe and easy to misunderstand. The trust acquires a controlling interest in your company. You receive the proceeds. The employees become the ultimate owners.

The part founders ask about most is the money. The trust rarely has cash on day one. So where does the consideration actually come from, and when do you get paid?

This post follows on from the November 2025 change to EOT capital gains tax relief. Here we look at the funding mechanics: how the trust pays you out, what limits the pace, and the conditions you cannot afford to breach.

Who this applies to

• Founders and shareholders considering a sale to an EOT.
• Owner-managers comparing an EOT exit with a trade sale or Business Asset Disposal Relief.
• Engineering, manufacturing and R&D-intensive businesses with stable profits and a management team ready to step up.
• Company directors who will sit on the trustee board after completion.

Where the money comes from

The trust pays you from one source above all others: the company's future profits. The company earns profit, that profit becomes available after Corporation Tax, and the cash is passed to the trust to settle what it owes you.

This is why an EOT sale is normally structured as deferred consideration. You agree a market value for your shares, the trust commits to pay it, and the balance is paid down over a period of years as the company generates the cash.

Three routes are commonly used to move that cash, often in combination.

1. Company contributions to the trust

The company makes cash contributions to the trust, which the trust then uses to pay you. The tax treatment of these contributions is not a given. Whether a payment is treated as a distribution, and how it is treated for Corporation Tax, depends on the facts, and HMRC guidance in this area has become more nuanced since 2024. Take specific advice on each contribution rather than assuming an outcome. Either way, the cash is funded from the company's profits, so plan for the Corporation Tax cost first: 19% on profits up to £50,000 (the small profits rate), 25% above £250,000 (the main rate), with marginal relief between the two.

2. The dividend route

The trust holds your former shares, so it receives dividends like any other shareholder. Those dividends can be applied to the deferred consideration. Dividends can only be paid out of distributable reserves, so reserves, not just cash in the bank, set the ceiling on what the trust can pay you in any given year.

3. Third-party or vendor finance

Where you want more cash on completion, the company can borrow from a bank, or you can accept a vendor loan and be repaid over time. Bank debt brings the proceeds forward but adds interest cost and covenants. Most EOT deals blend a modest upfront payment with deferred consideration funded from trading profit.

The distributable reserves test

Distributable reserves are the practical brake on EOT funding. Cash can be sitting in the account, but if the company does not have sufficient distributable profits, it cannot lawfully pass that cash up through dividends, and contribution routes can raise the same company-law questions.

This matters for pace. A profitable company with thin accumulated reserves may have the cash to pay you but not the reserves to release it cleanly. The fix is planning, not improvisation: model the reserves position alongside the cash position before you agree the payment schedule.

Hive-up structures

Where trade and cash sit in different parts of a group, a hive-up can help. Moving the trade, or inserting a new holding company, can consolidate distributable reserves and trading cash at the level that funds the trust. This is a structuring decision to take before completion, with company-law and tax advice, not a fix to reach for once payments stall.

How the new CGT position changes the cash flow

From 26 November 2025, CGT relief on a disposal to an EOT was cut from 100% to 50% by Finance Act 2026, section 35. Half of your gain is now taxable in the year of sale, giving an effective CGT rate of around 12% for a higher-rate taxpayer.

That tax can fall due before most of your consideration arrives. Relief is not automatic, but where consideration is payable by instalments over a period of more than 18 months, the seller may apply under section 280 TCGA 1992 to pay the CGT by instalments. HMRC will normally expect tax instalments to be paid in line with the consideration schedule. The point for funding is simple: your early payments carry a tax cost that the old 100% relief did not impose, so the schedule needs to keep you whole, not just paid.

Old funding picture vs new funding picture

Feature	Before 26 November 2025	From 26 November 2025
CGT relief on the gain	100%	50%
Effective CGT rate (higher-rate seller)	0%	Around 12%
Funding source for the payout	Company post-tax profit	Company post-tax profit (unchanged)
Main pace limiter	Distributable reserves and cash	Distributable reserves and cash (unchanged)
Net cash to seller from early instalments	Full instalment	Instalment less CGT due on the taxable half

The mechanics of how the trust pays you have not changed. What changed is the tax you carry on the way through, so the funding plan has to account for it.

The timing trap: do not breach the qualifying conditions

The way you are paid can disturb the relief itself. Consideration paid to the former owners must not exceed market value. Pay more than market value and you create a tax charge and put the relief at risk.

The trust must also retain its controlling interest and apply its property for the benefit of all eligible employees on the same terms. A payment structure that quietly favours the former owners, or that drains the company so the trust cannot meet the all-employee benefit requirement, is a problem. HMRC sets out the relief and its conditions in the Capital Gains Manual at CG67800 onwards and in the legislation at sections 236H to 236U TCGA 1992.

One further point for estate planning. If you die with deferred consideration still outstanding, the right to those payments is an asset of your estate. Read this alongside the BPR and APR cap from April 2026, because the interaction with business property relief is rarely as simple as it looks.

Worked example

Assumptions. Aisha sells 100% of her engineering company to an EOT for an agreed market value of £4,000,000. She takes £500,000 on completion, funded by a modest bank facility, with the remaining £3,500,000 as deferred consideration paid from future profits over seven years. She is a higher-rate taxpayer. The company makes around £900,000 profit a year and has healthy distributable reserves.

CGT position. Assume a chargeable gain of £3,900,000 after costs. With 50% relief, £1,950,000 is taxable. At a 24% CGT rate that is £468,000 of CGT, an effective rate of 12% on the full gain. Where the consideration runs beyond 18 months, the CGT can be paid by instalments on application under section 280 TCGA 1992 rather than all on day one.

Funding the deferred consideration. The company contributes profit to the trust each year, and dividends on the held shares can supplement it. To clear £3,500,000 over seven years the company needs to release around £500,000 a year to the trust. On £900,000 of annual profit, after Corporation Tax and ordinary reinvestment, that is achievable but it is not loose change. The schedule is built around the reserves and cash the company can realistically spare.

Result. Aisha is paid out over seven years from the company she built, retains an effective 12% CGT cost on her gain, and the trust keeps its controlling interest throughout. Clear value. Clear schedule. Clear conditions.

Lexmore's View

EOT funding is a cash-flow exercise wearing a tax-relief badge. The relief gets the headlines, but the deal lives or dies on whether the company can generate the profit, hold the reserves, and pay you down without breaching the conditions that gave you the relief in the first place.

We model the payout schedule against distributable reserves and Corporation Tax before anyone signs, and we say so plainly if the numbers do not support the timetable a founder has in mind. An EOT that cannot fund itself is not a kindness to the employees who inherit it.

References

• GOV.UK, Corporation Tax rates and reliefs
• GOV.UK, Dividends paid and received by companies
• HMRC, Capital Gains Manual CG67800: Employee-ownership trusts
• legislation.gov.uk, Taxation of Chargeable Gains Act 1992, sections 236H to 236U
• legislation.gov.uk, Taxation of Chargeable Gains Act 1992, section 280: consideration payable by instalments
• legislation.gov.uk, Finance Act 2026, section 35: restriction of relief on disposals to employee ownership trusts