After significant changes were announced to the tax regime governing Employee Ownership Trusts (“EOTs”) in the 2024 and 2025 Budgets, it was a relief that the 2026 Budget, announced on Wednesday this week, contained no further changes. There was no size limit placed on the capital gains tax relief (“EOT Relief”), no change to the rate of CGT applied when using EOT Relief (effective 12% rate) and no new restrictions on how the EOT funds the purchase price when it acquires a company. For owners of small and medium-sized businesses planning their exit, this is welcome news.
In fact, the Budget made a sale to an EOT look slightly more attractive when compared to the alternatives. The main alternative tax relief for business sellers, Business Asset Disposal Relief (“BADR”), is being limited to £0.5m (from £1.0m).
What the Budget did, and did not, change
The headline capital gains tax rates are unchanged at 18% (basic rate taxpayers) and 24% (higher/additional rate taxpayers). The measures contained in the Budget that might matter for business owners considering a sale of their company are:
- Business Asset Disposal Relief is halved. For disposals on or after 6 April 2027, the lifetime limit on gains taxed at the 18% BADR rate falls from £1m to £500,000. A typical trade sale therefore becomes less tax efficient.
- A new Founders' Relief is proposed. From April 2027, qualifying founders of "high-growth and innovative companies" could pay 10% on up to £10m of lifetime gains. The detailed conditions are out to consultation until 30 November 2026, and the target is clearly venture-backed growth companies rather than the conventional SME firm.
- EOT Relief. No changes – the 12% effective rate of CGT remains and unlike BADR there is no cap on the relief.
The lack of any changes to the EOT tax regime in this Budget is notable, as it comes against the backdrop of significant changes in the previous two years. In October 2024 the government tightened the rules governing eligibility for EOT Relief (these were sensible reforms necessary to prevent potential abuse of the relief), and in November 2025 it raised the effective rate of CGT applied when EOT Relief is claimed from 0% to 12%, with immediate effect. Many advisers feared a further squeeze this year, but thankfully that has not happened.
Why the EOT was created
The EOT was introduced by the Finance Act 2014, following the 2012 Nuttall Review of employee ownership. It was designed to solve a specific problem: what happens to a good, profitable SME when its founder wants to step back. Four aims sit behind the legislation, none of them has changed and they all share broad political support.
1. To preserve SME employers. Many founders have no family successor and no obvious management buyer. Their realistic options are a sale to a competitor, a sale to private equity or a gradual wind-down. A trade buyer may want the customer list rather than the company, and often integrates, relocates or closes it within a few years. The EOT gives the owner a buyer that wants the business to continue as it is. The company keeps its name, its culture and its independence.
2. To keep jobs in their communities. SMEs are the backbone of many local economies. When a regional engineering firm or a market-town practice is absorbed by a larger group, the jobs, the supplier spend and the local sponsorship often move with it. An EOT keeps decision-making where the business already is. Because the trust must hold a controlling stake for the benefit of all employees, there isa structural bias towards staying put and protecting jobs rather than stripping costs.
3. To give founders a tax-efficient exit. Parliament recognised that an owner who sells to their staff usually accepts a market value price paid over several years, rather than a competitive auction and a large upfront cheque. Generous capital gains tax relief was the incentive to make that choice worthwhile. Even though EOT Relief has since been restricted such that the effective rate of CGT has risen from 0% to 12%, the relief remains very attractive.
4. To share wealth with the people who create it. A business's value is built by its whole workforce, not by its shareholders alone. Under an EOT, employees benefit from future profits as the business grows. They can receive some of their profit share rewards tax-free - up to£3,600 per employee per year is not subject to income tax. The aim was to spread the rewards of business success more widely, and to strengthen engagement and productivity along the way.
The November 2025 cut to EOT Relief changed the third aim indegree, not in kind. The other three remain in force.
Why a sale to an EOT is still the optimal solution for many SME owners
It would be wrong to pretend nothing has changed since the early days of EOTs. Until November 2025, a qualifying sale to an EOT was completely free of capital gains tax. Since26 November 2025, only half the gain is exempt, and BADR cannot be claimed alongside EOT Relief. For a higher-rate taxpayer, that means an effective CGT rate of 12% on the whole gain - half of what most owners will pay on any other route.
What about the new Founders' Relief at 10% on the first £10mof gain? This relief is aimed at "high-growth and innovative" companies and its conditions are not yet settled. Most owners of established trading businesses (the manufacturer, the professional practice, the distributor) should not plan on being able to qualify for the relief.
Tax is only part of the picture - owners of businesses with less than about £2m of EBITDA face a small pool of potential buyers for their business, and a high percentage of sale processes to a trade buyer or private equity fall through due to valuation, funding or due diligence issues. An EOT transaction does not suffer from these pitfalls. There is no outside buyer to lose funding or chip the price, due diligence is light, and the owner sets the timetable.
The trade-offs are, however, real. The price that the EOT pays to the owner is received over time, usually 5-8 years, and funded from the future profits of the company. The owner cannot control the trust after the sale. If the trust breaches the rules within four tax years, the relief can be clawed back. But for an owner who wants a fair price, a certain outcome and a lasting legacy, no other route meets these objectives. It is for this reason that over 2,000 business owners in the UK have chosen to sell their companies to an EOT since 2014.
What owners should do now
The Budget has given SME owners something they have not had for two years: a period of stability for EOTs. They can use this to:
- Plan with confidence. The EOT tax regime is now settled after the 2024 and 2025 changes. Owners who paused their plans waiting for this Budget can restart them.
- Watch the April 2027 date. If you are weighing a trade sale against an EOT, the BADR cut on 6 April 2027 makes the trade sale less tax efficient.
- Get the valuation right. Trustees must take reasonable steps to ensure they pay no more than market value – EOT Relief is only available on that basis. An independent, well-supported valuation protects the owner and the trustees.
- Model the funding. Most EOT sales are paid from future profits. A realistic payment schedule that the business can afford, without starving it of investment or working capital, is the foundation of a successful transition.
- Prepare the next generation of leaders. An EOT works best when a capable management team is ready to run the business after the founder steps back.
The Employee Ownership Trust was created to keep good businesses independent, keep jobs in their communities, give founders a fair and tax-efficient exit and share wealth with the people who create it. This week’s Budget did nothing to change any of that. If you are thinking about your exit in the next few years, it is worth putting an EOT side by side with a sale to a trade buyer or to private equity before you commit to one route.