Long term incentive plans (LTIPs), Employee ownership trusts (EOTs) and Employee Benefit Trusts (EBTs)

A short overview can help you understand which structure may be suitable for your business. The main uses of each structure are summarised below.

• Long Term Incentive Plan (LTIP) are commonly used to reward senior executives where awards fall outside the limits or eligibility requirements of HMRC-approved share plans. LTIPs can operate alongside approved and unapproved share options and share awards.
• Employee Share Ownership Trusts (EOTs) can enable business owners to transfer control of a trading company to a trust for the benefit of its employees. Qualifying disposals made on or after 26 November 2025 benefit from relief on 50% of the capital gain, with the remaining 50% chargeable under the normal rules. We can review the proposed transaction, identify potential risks to relief, including valuation, employee benefit and trustee independence, and assist with the necessary documentation and HMRC clearance where appropriate.
• Employee Benefit Trusts (EBTs) can hold shares, provide a market for shares in a private company and support employee incentive arrangements. The employer may fund the trust, which can then acquire shares for future distribution or purchase shares from employees who wish to sell. We can draft the relevant documentation and liaise with the trustees to help implement the arrangement.

LTIP - The basic idea

An LTIP allows participants to receive share options or shares if they satisfy specified performance criteria over a period of time. In some arrangements, participants may also be required to invest part of their salary or cash bonus in acquiring shares.

An EBT is often established to hold shares for an LTIP. The directors typically determine the participants, performance criteria, share-retention requirements and other plan terms. Tax considerations can form an important part of the plan’s design, and we can advise on the available structures.

Performance criteria under an LTIP

The value or number of awards delivered under an LTIP usually depends on performance targets linked to the company’s growth and other business metrics. Increasingly, targets may also include behavioural or other non-financial measures designed to support the company’s culture and objectives.

How are LTIP's taxed

The tax treatment depends on the structure of the award and the circumstances in which it is granted, exercised or delivered. For example:

• A bonus delivered in shares may be subject to Income Tax and National Insurance contributions.
• Share options may be taxed differently depending on whether they qualify for an approved scheme, such as a Company Share Option Plan (CSOP), or are unapproved. Capital gains treatment may be available in appropriate circumstances.

LTIPs and Employee Benefit Trusts

Many companies use an EBT to hold shares for an LTIP. This can help facilitate the delivery of awards and, where appropriate, provide a mechanism for purchasing shares from employees who wish to sell. The arrangements must be designed carefully to meet the company’s commercial objectives and applicable tax requirements.

Why use of an Employee Ownership Trust (EOT)?

An EOT is a trust established to hold a controlling interest in a trading company for the benefit of its employees. It can provide an exit route for shareholders who wish to transfer ownership to the workforce rather than sell to a third party.

For qualifying disposals made on or after 26 November 2025, 50% of the gain is exempt from Capital Gains Tax under EOT relief, while the remaining 50% is chargeable under the normal rules. The relief is subject to statutory conditions and is not available to corporate sellers.

An EOT may be suitable where the exiting shareholders wish to reward employees by enabling them to benefit indirectly from the company’s ownership and future performance.

There are important conditions to consider. The EOT must acquire a controlling interest and operate for the benefit of eligible employees. The transaction must also satisfy the applicable statutory requirements, including those concerning trustee independence and the valuation of the shares. The purchase price and funding arrangements should be carefully assessed to ensure that the transaction is commercially sustainable. Shares may also be gifted to an EOT, subject to the relevant legal and tax considerations.

Key points to note with Employee Ownership Trusts

• The trust must benefit all eligible employees on the same terms, subject to permitted differences under the legislation.
• The company must be a trading company or the parent company of a trading group and meet the relevant statutory conditions.
• The EOT must acquire a controlling interest in the company.
• The statutory participation requirement limits the proportion of employees who are continuing shareholders and also directors or employees. This can affect whether smaller companies qualify.
• An EOT can enable employees to benefit indirectly from ownership without having to fund a direct purchase of shares themselves.
• An EOT can provide an identified purchaser for the exiting shareholders, although the transaction still requires appropriate valuation, funding and implementation.
• Qualifying individual sellers may claim EOT Capital Gains Tax relief, subject to the applicable conditions and the restrictions introduced for disposals from 26 November 2025.
• Minority shareholders are not automatically required to sell simply because an EOT is established; the position depends on the transaction structure and applicable rights.

All employees

A company controlled by an EOT may be able to pay qualifying Income Tax-free bonuses of up to £3,600 per employee each tax year. The statutory conditions must be satisfied, including requirements concerning the employees who benefit and the terms on which bonuses are awarded.

Drawback to EOTs

One practical challenge is ensuring that the company has a capable management team to run the business after the shareholders exit. However, the EOT generally acts as a shareholder rather than managing the company’s day-to-day operations. The board can continue to run the business, subject to its legal duties and any applicable governance arrangements.

This is particularly important where the purchase price is funded through borrowing or deferred consideration. The company’s ability to generate sufficient cash to service the funding arrangements should be assessed before the transaction proceeds.

Employee benefit trusts (EBTs)

An EBT is generally a discretionary trust established to hold shares or other assets for the benefit of employees and, in some cases, their families or dependants. EBTs are commonly used to support LTIPs, share option plans and other employee incentive arrangements.

Function and tax treatment of EBTs

An employer may contribute funds or lend money to an EBT, which can then hold or acquire assets for employee benefits. The trustees may use the trust’s assets to support incentive awards, bonuses or employee share schemes. As the trust is discretionary, employees do not generally have an automatic entitlement to its assets unless and until a benefit is awarded.

There is no general Capital Gains Tax exemption simply because shares are transferred to an EBT. A transfer or disposal may give rise to tax consequences for the transferor, depending on the circumstances. Any available relief must be considered separately, and HMRC clearance may be appropriate in some cases.

The tax treatment of the trustees also depends on the trust’s residence and the relevant circumstances. Non-UK-resident trustees may be outside the scope of UK Capital Gains Tax on trust gains, but offshore arrangements require careful consideration of the wider tax rules and should not be assumed to be tax-free.

Benefits and drawbacks

An EBT can provide a structured way to hold company shares for employee incentives and facilitate share transfers, including purchases from employees who wish to exit. It may support employee retention and align employee interests with the company’s performance and long-term objectives.

However, the trust’s benefits depend on its design, funding, trustee arrangements and tax treatment. The costs and ongoing administration should be weighed against the intended commercial benefits before implementation.