Employee Ownership Trust Sales After the 2025 Changes: How the Tax Works

Quick answer: For sales to an Employee Ownership Trust (EOT) on or after 26 November 2025, half the gain is relieved and the other half is taxed at 18% or 24%. Before that, the sale was free of capital gains tax. Conditions also tightened from 30 October 2024. An EOT can still beat a trade sale on tax, particularly on larger gains, but the price is usually paid over several years from the company's profits.

What an EOT is

An EOT is a trust that holds a controlling stake in a company for the benefit of all its employees. The owners sell their shares to the trustees. The trust does not usually have the cash, so the company makes contributions to the trustees over time, and the trustees pay the owners from those. The price is therefore usually deferred and funded from future profits.

Employees do not buy anything. The business stays independent, and the existing management often carries on running it. The company can also pay qualifying bonuses of up to £3,600 per employee per tax year free of income tax, if made to all employees on equal terms. National Insurance is still due.

What changed, and when

From 30 October 2024:

• trustees must be UK resident and independent of the sellers, and fewer than half can be former owners or connected persons;
• former owners cannot keep control of the trust;
• trustees must take reasonable steps to ensure the price is no more than market value, and interest on deferred payments must be at a reasonable commercial rate;
• the clawback period runs to the end of the fourth tax year after the sale;
• the claim must state the sale proceeds and the number of employees.

From 26 November 2025:

• only 50% of the gain is relieved;
• the other 50% is chargeable on the seller at the time of sale, at 18% within the basic rate band and 24% above it;
• the relieved half is held over and deducted from the trustees' acquisition cost, so it comes into charge if the trustees later dispose of the shares.

Business Asset Disposal Relief and Investors' Relief cannot be claimed on a sale where EOT relief is used. You compare the two routes. You cannot combine them.

EOT or trade sale: the tax

Example: You sell a company at a gain of £2m. Ignoring the annual exempt amount and assuming all the gain would fall at 24%, a sale to an EOT charges tax on half of it: £1m at 24% is £240,000. A trade sale with BADR would charge £1m at 18% and £1m at 24%, about £420,000. The EOT route saves about £180,000 in this simplified case. But the EOT price is paid over time, and a trade buyer might pay more. The figures are hypothetical and ignore other income.

The comparison shifts with the size of the gain and your other income. On larger gains the EOT is usually cheaper. On smaller gains the gap narrows.

The conditions

The relief is in sections 236H to 236U of the Taxation of Chargeable Gains Act 1992. In broad terms:

• Seller. An individual or trustee, not a company.
• Trading. The company is a trading company, or the principal company of a trading group, at the time of sale and to the end of that tax year.
• Controlling interest. The trust holds more than 50% of the ordinary shares, votes, distributable profits and assets on a winding up. A part sale is possible if the trust ends with control.
• All-employee benefit. The trust benefits all eligible employees on the same terms. Benefits can vary only by pay, length of service or hours worked. A qualifying period of up to 12 months is allowed.
• Limited participation. Owners and connected people who are also employees must not exceed 40% of the employees. Holders under 5% are disregarded.
• Trustees and price. As set out above.

What can go wrong

Relief can be withdrawn if, in any of the first four tax years after the year of sale, the trustees stop being UK resident, the company stops trading, the benefit or independence conditions fail, the trust loses its controlling interest or the participator fraction goes above 40%. Your gain is then recalculated as though the claim was never made. A sale by the trustees during that period can also bring the held-over half into charge.

Other practical points:

• Funding. The company must afford the payments. A stretched business will struggle, and your price depends on future profits.
• Tax before cash. The gain is generally charged in the year of sale on the full price, including deferred amounts. For payments over more than 18 months you may be able to pay by instalments. Plan the tax cash flow at the start.
• Governance. You can stay as a director or employee and be paid reasonably for the work, but you cannot control the trust.
• Valuation. The price must be supportable, usually by an independent valuation, so it may be lower than a trade buyer would pay.
• Instalments are not income where the deal is set up properly. Clearance from HMRC is often sought to confirm that the company's contributions are not treated as distributions.

Is an EOT right for you?

It can suit profitable, stable businesses with a strong team, and an owner who values legacy and a fair price over a premium. It is less suitable where the business cannot fund the payments, or you need all your cash on completion. We compare an EOT with a management buy-out and a trade sale on after-tax numbers. Our article on the pros and cons of selling to an EOT is a good place to read next, and so is our overview of selling a business. The service page is Sale to an Employee Ownership Trust.

Talk to us about Sale to an Employee Ownership Trust

• For disposals from 26 November 2025, half the gain is relieved and half is taxed at 18% or 24%
• Business Asset Disposal Relief cannot be claimed on a sale where EOT relief is used
• From 30 October 2024 trustees must be UK resident and independent, and the price must not exceed market value

See how we help or book a free 20-minute call.

FAQs

How much capital gains tax do I pay on selling to an EOT?

For disposals on or after 26 November 2025, 50% of the gain is chargeable on you at the time of sale, at 18% within the basic rate band and 24% above it. The other 50% is relieved. That usually still compares well with a trade sale, but it is no longer tax free.

Can I still claim BADR on an EOT sale?

No. Where EOT relief is claimed, the disposal is not a qualifying business disposal for BADR, and Investors' Relief is not available either. You compare EOT relief with a BADR sale. We model both on your numbers.

Do the trustees have to be independent of me?

Yes, since 30 October 2024. Fewer than half of the trustees can be former owners or connected to them, and those people cannot hold control over the trust. A professional trustee is common. Founders can stay as directors but cannot control the trust.

What happens to me after the sale?

Many sellers stay on for a time as directors or advisers and are paid normally for the work. You cannot keep control through the trust. What you do and what you are paid should be reasonable. Agree your future role at the planning stage.

How long does an EOT sale take?

It depends mainly on funding, valuation and how well prepared the business is. HMRC answers the main statutory clearances within 30 days, so an application should be built into the timetable. Starting the tax planning before terms are agreed with the trustees avoids delays and expensive changes later.

Next step

If you are thinking about an EOT, we will check whether it is likely to work and what it is worth compared with the alternatives. We offer a free 20-minute call. Book a call.