What were the changes to EOT Relief announced in the November 2025 Budget?
On 26 November 2025, the proportion of capital gain that was eligible for CGT relief on a qualifying sale to an Employee Ownership Trust (“EOT Relief”) was cut from 100% to 50%. The change took effect on that date, sales completing from 26 November 2025 onward are assessed under the new regime.
Before 26 November 2025, a sale of shares to an EOT attracted full CGT relief, charged at a rate of 0% CGT for the seller, subject to the qualifying conditions. From 26 November 2025, half the gain is relieved and half is charged at the prevailing CGT rate. At the current 24% standard rate, that is an effective 12% CGT charge on the whole gain (half × 24% = 12%).
Effective rate of CGT
Effective rate of CGT
How the 12% effective rate is calculated
The worked example is illustrative and the phasing of proceeds and tax payments over time will depend on the transaction structure. An EOT Transaction is likely to have a significant amount of the sale consideration deferred (typically over 5-8 years), and a conventional sale (eg to a trade buyer) is likely to have a significant amount of the sale consideration deferred and / or contingent on an earn out structure.
Sale to EOT
£m
Conventional sale
£m
Gross proceeds
6,000,000
6,000,000
Less: base cost of shares sold
0
0
Capital gain
6,000,000
6,000,000
Relief on gain:
EOT Relief (half of gain)
(3,000,000)
BADR (first £1m of gain)
(1,000,000)
Gain chargeable to standard rate CGT
3,000,000
5,000,000
CGT standard rate charge
(24.0%)
(720,000)
(1,200,000)
Gain chargeable at lower rate CGT:
3,000,000
1,000,000
EOT Relief (0.0%)
0
BADR (18.0%)
(180,000)
Total CGT payable
(720,000)
(1,380,000)
CGT as % of gain
12.0%
23.0%
A business owner selling 100% of their shares in a company for a market value of £6m, assuming all the conditions for EOT Relief are satisfied, would have a CGT liability of £720k as we show in the worked example:
Assumptions / Notes
- Sale at market value in both cases
- Normally minimal base cost for business founder
Is an EOT still an attractive exit option in 2026?
"The employee ownership trust’s tax incentives have been a powerful catalyst, helping the sector grow from around 150 employee owned businesses in 2014 to more than 2,700 in 2025. Findings from both HMRC and independent research sponsored by the EOA have found that the tax incentive has been a key factor in the decision to transition to employee ownership in a significant number of cases, though is often not the only factor in decision making."
- Employee Ownership Association (“EOA”),February 2026
Reducing the tax incentive available for a sale to an EOT is unhelpful, particularly for founders who might have been considering a sale in 2026 or 2027, and had assumed a zero rate of CGT would apply, based on the tax regime that was in force between 2014 and November 2025.
However, an exit through sale to an EOT, which now attracts an effective CGT rate of 12%, remains the most tax-advantaged exit route available to most private-company founders in the UK, with the alternative (a sale to a trade buyer, or to a financial buyer, or to the company’s management team) attracting CGT at between 18-24%.
A decision as to which exit option to pursue is also not purely a financial one, driven by tax. A sale to an EOT offers many other benefits: by retaining the independence of the company it can help preserve the founder’s legacy and the culture of the company, it can reward all the employees who have helped build the business by offering long-term profit share participation, and it can reassure clients and suppliers that a change of ownership will not result in a change in business strategy or management.
Indeed, the case for a sale to an EOT, in our experience across hundreds of conversations with UK founders, is rarely purely based on the tax treatment.
EOT versus trade sale, which is “better” ?
A trade sale can often fail to complete due to problems during due diligence, or a failure to raise funding, or through onerous warranties / indemnities being demanded by the purchaser. Indeed, we estimate that over 75% of SMEs that initiate a sale process fail to achieve completion.
Furthermore, if completion does occur, vendors of SMEs often find that the initial headline price for the sale, which may be attractive, is not always realised. Adjustments arising from completion accounts, earn-out structures, warranty claims and minority share retentions can reduce the actual proceeds received on sale well below the headline price.
EOT versus sale to private equity, which is “better” ?
Once again, a private equity buyer may be able to offer an attractive price for the company as a result of efficient funding structures (use of debt) and possibly synergies (if acquiring through a platform company).
However, private equity returns are driven by the subsequent exit (typically 3-8 years after the acquisition). To achieve an exit within this period often involves significant changes to the company being acquired: a change in management, a change in business strategy and a restructuring of the business. The founder is also often required to retain a significant minority stake, but without control over the exit decision or business strategy.
Changes to EOT Relief conditions, announced in 2024 Budget
The changes introduced in the 2024 Budget effectively mean that the Trustee (which is normally a UK corporate entity where individual trustees sit as directors) must be carefully constituted. To comply with these provisions and to conform with good practice, the trustees should comprise: an independent trustee (often an accountant, lawyer or financial adviser), an employee (who is not a vendor shareholder, or related to a vendor shareholder) and a vendor shareholder (normally the founder / one of the founders).
01
Since the introduction of EOT Relief in 2014, which applies a reduced rate of CGT to the gain realised on the sale of shares to an EOT (nil rate of CGT up until 25 November 2025; 12% rate of CGT from 26 November 2025), EOT Relief has been available only if a number of conditions can be satisfied, which are:
- The vendor shareholder must be a UK tax-resident individual (not a corporate entity)
- The shares being sold must be in a UK limited company, which is a trading company (not an investment company)
- The EOT must acquire control of the company (>50.1% ownership)
- The EOT must be constituted as a trust whose beneficiaries are all of the employees (from time to time) of the company
- The company must for the 12 months prior to the transaction have had no more than 40% of its employees holding 5% or more of the shares in the company (eg if there are 10 employees during the 12 month period, then at least 6 employees do not have 5% or more individual shareholdings and are not related to a shareholder who has 5% or greater shareholding)
02
The 30 October 2024 Autumn Budget introduced some additional requirements beyond those listed above.
- The EOT must be controlled by a Trustee which is UK domiciled (not overseas)
- The Trustee must be independent of the vendor shareholders
- The Trustee must have taken measures to ensure that it is not paying a price above market value for the shares it acquires from the vendor shareholders (i.e. the price should be determined by an independent valuation which the Trustee has reviewed)
- EOT Relief may be clawed back from the vendor shareholders if, within the four tax years after the tax year in which the EOT transaction took place, the company ceases to be a trading company, or the EOT ceases to have a controlling stake in the company, or the Trustee is not UK-domiciled, or the Trustee is no longer independent of the vendor shareholders.
FAQ, Budget questions we hear most weeks
The CGT charge at 12% of the gain does crystallise at the date of sale, and is payable by the 31 January following the end of the tax year in which the EOT Transaction completed. So for example, if the EOT Transaction took place on 30 September 2026 (which is within the tax year 2026/27) the CGT would be payable by vendor shareholders before 31 January 2028. If the sale proceeds that have been received by the CGT due date (31 January 2028 in the example above) are less than 2.0x the CGT liability payable, then the vendor shareholder can apply to HMRC to pay the CGT liability in instalments, under the provisions of s.280 of TCGA, 1992. So for example, if a founder sold 100% of shares in a company for £6m on 30 September 2026, and had received £1m by 31 January 2028 (with the balance of £5m payable as deferred consideration over the next 5-8 years), he/she would have received £1m of proceeds out of which a CGT liability of £6m x 12% = £720k is payable. This is a ratio of 1.0/0.72 = 1.39x so the vendor could apply to pay CGT by instalments, with the first instalment set at £1.0m x 50% = £500k payable on 31 January 2028, and further instalments set at 50% of proceeds until the overall £720k tax liability has been settled.
EOT Relief can be clawed back if, within a 4 year period starting from the end of the tax year in which the EOT Transaction took place, the EOT ceases to be independent (because a majority of the trustees are connected to the vendor shareholders), the EOT ceases to be UK domiciled (because a majority of the trustees are located offshore), the EOT ceases to have control of the Company or the Company ceases to trade. It is important therefore to ensure that the trustee company which administers the EOT is correctly constituted - if so these risks can be managed and should not be material.
The typical EOT transaction timeline from appointment of advisers to completion is 3-4 months, which includes 3-4 weeks for the HMRC clearance (TIS). A conventional sale process (sale to trade buyer, financial buyer or management team) will typically take 18-24 months from appointment of advisers to completion.
Yes. The effective date at which CGT is charged is the completion date. Deals that completed before 26 November 2025 attracted 100% relief (nil rate of CGT). Deals completing on or after that date are assessed at 50% relief (12%effective rate of CGT).
Yes. The October 2024 Budget announced a number of changes to the conditions for EOT Relief, one of which is that the majority of trustees must be independent of the selling shareholders. This ensures that effective control of the Company has passed away from the selling shareholders. The November 2025 Budget did not introduce any further changes to the conditions for EOT Relief, but did change the effective rate of CGT that is charged under EOT Relief, from 0% to 12%.
Yes, the Government still wishes to encourage EOT ownership and through EOT Relief the effective rate of CGT on sale of shares to an EOT now stands at 12% which compares favourably with the rate of CGT that would apply on a conventional sale (to a trade buyer or to a financial buyer / MBO) at 18-24%.
An EOT Transaction also avoids deal-failure risk (at least 30-40% of trade-sale processes do not complete) and can be executed at lower cost than a conventional sale.
We are happy to talk over Teams or meet to discuss your exit planning.
We can normally assess whether an EOT transaction will be viable and the likely valuation range at our first meeting.
For accountants, lawyers, and wealth managers
Are you working with a client who should be considering a sale of their business to an EOT? We will complement the work you do to deliver an optimal outcome for your client.