Changes to CGT on sales to Employee Ownership Trusts (“EOTs”)

The Budget on 26 November 2025 included an announcement on the change to the tax treatment of sales of shares to an EOT.

What has changed?

The sale of shares to an EOT before 26 November 2026 qualified for 100% relief from capital gains tax (“CGT”) provided the EOT obtained control of the company. The CGT relief had to be claimed by the sellers and only applied to shares sold in the same tax year in which the EOT obtained control of the company.

Sales to an EOT on or after 26 November 2025 will qualify for 50% relief from CGT so sellers will be subject to an effective rate of CGT of 12% on a sale to an EOT. The sellers will still need to claim the relief in their tax return and ensure that the qualifying conditions for an EOT are satisfied. There is no upper limit on the value of the shares being sold to an EOT; the whole value will qualify for the 50% CGT relief.

Where a claim for relief due to the sale to an EOT is made, the sellers will not be able to make a claim for Business Asset Disposal Relief (“BADR”) in relation to the proportion of the gain that is subject to CGT. The sellers have a binary choice of claiming EOT relief or BADR.

BADR requires ownership of at least 5% of the shares in a trading company and being an employee or a director, with both conditions being satisfied for two years prior to the sale. However, BADR is subject to a lifetime limit of £1m and triggers a CGT rate of 14% for a sale on or before 5 April 2026 and 18% thereafter. The tax saving for a higher rate taxpayer from 6 April 2026 from claiming the maximum relief under BADR will be £60,000.

Our views on the change

The reduction in value of the relief from CGT although unwelcome is not completely unexpected given the pressures on government expenditure and the need to raise tax revenues. EOTs are possibly paying for their popularity as the expected cost of the tax relief has ballooned from £100m to an anticipated £2Bn during the 15 years since EOTs were introduced in 2014. The fact that the 50% relief is not subject to a financial cap is good news. In our article on the future of the EO sector published on 20 June 2025  we suggested that a £1m limit on the relief for sales to EOT could be introduced.

Sellers will now have to consider when they have to pay the CGT liability. CGT is payable by 31 January following the end of the tax year in which the transaction takes place. Therefore, the tax arising from a sale to an EOT completing on 31 March 2026 will be payable by 31 January 2027.

The sellers may not receive all the consideration on completion. The vast majority of EOT transactions have the consideration being paid in instalments over a period of up to 10 years. Sellers may want to make sure that they receive enough cash to pay the tax liability in full and still have some sale proceeds left over from the consideration received on completion.

Alternatively, sellers can take advantage of the ability in the tax legislation to pay the tax in instalments when the consideration is received from the EOT. The legislation requires the consideration to be payable in instalments over a period exceeding 18 months. The instalment option does require an application to HMRC and the tax instalment option is at the discretion of HMRC. It is our understanding that HMRC will look favourably on such applications involving EOTs. The Employee Ownership Association (“EOA”) is seeking clarity from HMRC and we are working with the EOA on this point alongside other advisers in the sector.

One key point is that HMRC require 50% of an instalment to be put towards paying the tax liability and the tax liability to be paid within eight years. This requirement could see a seller receiving less cash from the sale proceeds than they may otherwise expect in the first few years. The EOA is seeking confirmation that the instalment option for the tax will be applied for EOTs rather than the “may” be applied and a reduction in the 50% of any instalment to go towards the tax liability. The pressure on tax revenues may mean an inability to change the current payment profile of the tax liability.

A reduction in the number of EOTs?

We do not expect to see a reduction in the number of transactions involving a sale to an EOT as a result of the reduction in tax relief. None of the current transitions to EO we are working on as a firm have been stopped as a result of the reduction in tax relief. We have heard the same message from other EO advisers. A sale to an EOT is still more favourable in pure tax terms compared to a trade sale.

The change to the CGT relief claw back provisions from 30 October 2024 which increased the claw back window for sellers from two to five years has had more of an adverse impact on transitions to EO. Sellers, who are considering EO to protect their business legacy and retain local jobs, have not been put off by the claw back window extension. We do not expect these types of sellers to be put off by the decrease in tax relief.

Conclusion

The reduction in tax relief was not completely unexpected and although unwelcome as a tax increase, it should not result in a major slow down in the popularity of EOTs as an exit strategy.