Employee Ownership Trusts - A strategic exit for family-owned engineering firms

In the evolving landscape of business succession, Employee Ownership Trusts (EOTs) are emerging as an alternative solution in the engineering sector and beyond. With recent tax changes reshaping the economic environment, EOTs can provide a tax-efficient exit strategy, while also safeguarding legacy, enhancing employee engagement, and ensuring business continuity in an increasingly competitive sector.

Why EOTs are gaining traction in engineering

Following the Autumn 2024 Budget, the Capital Gains Tax (CGT) landscape in the UK has changed significantly. The main CGT rate increased from 20% to 24% from 30 October 2024, while Business Asset Disposal Relief (BADR), formerly Entrepreneurs’ Relief, has risen from 10% to 14% from 6 April 2025 and is set to increase again to 18% from April 2026.

In response, more businesses, including family-owned businesses, are considering EOTs. For qualifying sales to an EOT, exiting shareholders may benefit from a complete CGT exemption. This relief, combined with a structure that supports long-term business continuity, can make the EOT particularly attractive for engineering firms navigating generational transitions or founder exits.

A match for engineering business dynamics

Engineering businesses often face unique operational and cultural challenges including long project cycles, technical knowledge embedded in key individuals, and a need for talent retention.

By transferring ownership to employees via a trust, being 51% or more of the shares, companies can promote a culture of shared responsibility and long-term investment. This can be especially effective in engineering environments where project success depends on close collaboration and the retention of highly skilled staff.

According to the 2024 Engineering Construction Industry Training Board (ECITB) Workforce Census, 71% of employers reported difficulties hiring qualified talent, a sharp rise from 53% in 2021. Employee ownership can differentiate engineering firms in the talent market, creating a strong retention tool and deepening employee commitment.

Beyond tax - strategic and operational benefits

EOTs do more than reduce tax liabilities. For many shareholders, the idea of selling to a competitor or third party raises concerns over confidentiality, cultural fit, and long-term impact on employees. An EOT can mitigate these issues, offering a controlled transition process that protects sensitive engineering intellectual property, client relationships, and operational integrity.

Moreover, by involving employees in the company’s long-term vision, firms often see increased productivity, lower absenteeism, and improved morale. These factors are critical to performance in technically demanding sectors.

What to consider before committing

That said, EOTs are not a one-size-fits-all solution. They require:

• Robust leadership succession planning: Future engineering leaders must be prepared and capable of driving the business forward.
• Ongoing employee engagement: For the EOT to succeed, the workforce must be aligned with the company's strategic goals.
• Viable financial structuring: Typically, the EOT will fund the purchase of shares through company profits over time. Deferred payment terms must be realistic and sustainable.
• Strong governance to ensure the structure is working as expected, manage risk and ensure protection for all parties.

It’s also important to note the Autumn 2024 Budget introduced new rules around EOTs to limit potential misuse. These include stricter controls to prevent former owners from retaining influence over the business, ensuring share purchase prices reflect market value, and extending the timeframe in which tax relief can be withdrawn if EOT conditions are breached.

Furthermore, an EOT is not the only opportunity to preserve legacy, engage employees and secure long-term independence of family-owned businesses. A thorough review of options available with your adviser is necessary to ensure a successful transition to the next management team.

Engineering a tax-efficient future

From a tax-efficiency perspective, a well-structured EOT exit can significantly outperform traditional trade sales or private equity deals. With no CGT due for qualifying disposals, the savings can be substantial, freeing up capital for reinvestment, retirement, or estate planning.

Whether you're a founder planning retirement or a second-generation leader seeking sustainable growth, it's essential to explore all options. EOTs represent an increasingly relevant model for engineering firms, but success depends on tailored advice, clear communication, and careful execution.

The engineering sector is built on precision, planning, and long-term thinking. A well-considered succession strategy can offer all three, providing a stable foundation for future innovation and continuity.

If you’re a business owner in the engineering sector considering your succession options, now is the time to explore whether an Employee Ownership Trust could be the right fit. The recent tax changes, combined with the cultural and operational benefits of employee ownership, mean that a well-structured EOT could help secure your legacy, protect your team, and strengthen your company’s long-term prospects. Contact our experts at tax@teamjs.co.uk to assess your options, understand the latest rules, and design a transition plan that aligns with both your personal goals and your business’s future.