Employee Ownership Trust (EOT) tax relief slashed by 50% – Autumn Budget 2025

In the 2025 Budget, the Chancellor removed the headline grabbing 0% capital gains tax (CGT) rate for disposals to an Employee Ownership Trust (“EOT”), instead restricting relief to only 50%. The change is effective immediately and will affect anyone making a disposal of company shares to a qualifying EOT. 

An EOT is a Trust (typically a newly incorporated company) which will hold the shares for the benefit of the company’s employees.  

This will allow the company’s employees to have a stake in the business, and share on an ongoing basis and potential exit.  

In return, until today, the shareholder selling their shares to the EOT, enjoyed a reduced (0%) rate of CGT.  Due to the advantageous tax rate, there are a number of qualifying conditions to satisfy to prevent abuse of the relief, such as outgoing shareholders and their family being unable to participate in the EOT. 

What are the new EOT rules?

The reason for the change is that the cost of the 0% CGT relief has increased significantly in recent years. This is from an original estimate of £100 million in 2018-19 to £600 million in 2021-22 and forecasts suggest it could be £2 billion by 2028-29 if left unchecked.  

However, it is worth noting that these costings do not consider the changes over the past few Budgets. Previously Business Asset Disposal Relief (“BADR”) was 10% on up to £10 million of gains, so a 0% tax rate provided less of an incentive to sell to an EOT.  

Changes to CGT, namely the substantial reduction of the BADR lifetime allowance to £1 million and the increase in the rate to 14% (from April 2025) and 18% (from April 2026), made the 0% rate far more attractive in recent times.  

The tax would be calculated at the normal CGT rate of 24% (BADR not being available on a disposal to an EOT) but only 50% of the gain would be taxable, with the remainder being held over against the EOT for a future disposal. As an example, where an individual who is an additional rate taxpayer sells a business valued at £10 million (and minimal base cost) to an EOT, the total CGT would ordinarily be £2.4 million, but with the 50% relief, the outgoing shareholder only pays £1.2 million now. The remaining £1.2 million gain would be taxed on the EOT when it disposes of the company, assuming it occurs at least 4 tax years after the tax year in which it acquired the shares. 

Impact and looking ahead

One area where we could potentially see more scrutiny is valuation of the shares being sold. Last year’s Budget changes meant that an arm’s length price needs to be agreed between the selling shareholder and trustee. However, we have historically seen sellers take a more friendly approach and not be as aggressive with their valuations. This may change with the additional tax burden imposed.  

One potential upside could be that we may see more secondary and onward EOT sales/ exits. Previously where an EOT had acquired the company, if the seller was entitled to 0% CGT, it would put a substantial CGT burden on the EOT if it were to ever sell the shares since it would crystallise the entire liability from when the seller originally acquired the shares. Now EOTs may be more willing to sell to interested third parties where the price is right and the tax burden not so high. 

Whatever the case, the change is likely to dampen the excitement and allure of an EOT as a viable exit structure. Due to their inherent complexity and more risky nature if vendor financed, owners need to consider whether an EOT structure is still worth the current tax saving or whether another more flexible structure such as a traditional management buy-out might be more appropriate.  

If the Budget has raised any questions for you, or if you would like any further information or guidance on this topic, get in touch with your usual Kreston Reeves contact or contact us here.   

FAQs about the changes to Employee Ownership Trusts (EOTs)