EOTS AND CAPITAL GAINS TAX: WHAT THE 2025 BUDGET MEANS FOR EMPLOYEE-OWNED BUSINESS TRANSFERS
How the 2025 Budget Halves the CGT Relief for Employee Ownership Trust Sale
Introduction
Since their introduction in 2014, Employee Ownership Trusts (EOTs) have been a popular route for business owners to sell their company to the workforce, often with a tax-efficient exit. Under the original rules, a sale of shares to an EOT (provided certain conditions were met) benefited from 100% CGT relief, meaning the seller could dispose of their shares without an immediate capital gains tax charge. The 2025 Budget, however, substantially alters this incentive. As of 26 November 2025, the relief is being reduced: only 50% of the gain on disposal to an EOT will now be exempt, with the other 50% remaining a chargeable gain. For entrepreneurs thinking of transferring to employee ownership, or advisers structuring such deals, this is a material change that needs careful consideration.
What’s Changing - the New CGT Relief Rule
The new rule applies to disposals of shares to the trustees of an EOT completed on or after 26 November 2025.
- Under the revised relief: only 50% of the seller’s gain on disposal will be exempt from CGT. The other 50% will be treated as a chargeable gain and taxed accordingly.
- The portion of the gain that remains exempt is effectively “held over”: it will be reflected in the trustees’ acquisition cost, meaning the deferred gain becomes relevant if the EOT later disposes of the shares.
- Where the EOT relief is claimed, the disposal will not qualify for other CGT reliefs such as Business Asset Disposal Relief (BADR) or Investors' Relief (IR).
In short: the tax-free “exit via EOT” is no longer fully tax-free. Sellers now incur tax on half the gain at the point of sale (unless other reliefs or allowances apply).
Why the Change - Government’s Policy Rationale
The official explanation is that the EOT relief, once a modest incentive, has over time become much more costly to the public finances than originally anticipated. The Treasury estimates that, without reform, the relief could cost up to £2 billion over coming years - many times its original forecast. According to the government’s updated policy note, the reduction aims to strike a balance: retaining a “significant” incentive for genuine employee-owned businesses, while ensuring that sellers pay a “fair share” of tax on substantial gains. The measure forms part of a broader tightening of tax-advantaged entrepreneurial and ownership-transition regimes. It seems safe to say that this reflects concern over what the government sees as increasing use (or abuse) of EOTs as a tax-avoidance route rather than a genuine succession solution.
Who Is Affected - When This Matters
This change affects:
- Company owners (founders, shareholders) considering selling all or part of their shareholding to an EOT, especially those expecting a large capital gain.
- Businesses where an EOT sale was part of a planned succession strategy or exit, particularly owner-managed firms and SMEs.
- Trustees and boards setting up, or advising on, EOT transactions - as the economic math and tax outcome for sellers will now differ materially.
- Employee-owned companies, as the reduced relief could affect the attractiveness of the EOT route compared to other exit or sale strategies. In particular, those relying on the old 100% relief for planning a clean exit may find that their net proceeds (after CGT) are materially lower than previously assumed.
Practical Implications & What Business Owners Should Do
Given the change, business owners and advisers should:
- Re-run the numbers: any prospective sale to an EOT should now be modelled assuming only 50% CGT relief, factoring in current CGT rates, potential BADR/IR exclusion, and impact on net proceeds.
- Compare alternative exit routes: trade sale, management buy-out (MBO), private equity, or a standard sale may now be more attractive, depending on the value, purchaser appetite, and the business’s future prospects.
- Check timing and structure: for transactions completing before 26 November 2025, the old 100% relief remains.
- Ensure EOT conditions and documentation remain robust: the reduction does not remove the other EOT eligibility criteria - the trusteeship, employee-benefit requirements, and ongoing conditions still apply. Compliance remains critical.
- Set realistic employee/management expectations: a lower relief may affect how much the selling shareholders receive; senior management or employees looking for liquidity may need clarity and adjusted forecasts.
Conclusion
The 2025 Budget’s reduction of CGT relief for EOTs from 100% to 50% marks a significant recalibration of the UK’s support for employee-owned business succession. While the government retains, in principle, a commitment to encouraging employee ownership, the change makes the EOT route less of a tax-free escape and more of a partially taxed exit. For many owners, this means re-evaluating exit strategies, re-modelling financial outcomes, and having honest conversations about the after-tax value of an EOT sale.
If you, or your clients, are considering an EOT exit, or had one pencilled in under the old rules, now is the time to take action.
Get in touch via our contact page below if you’d like to run scenarios or discuss how the new regime affects your plans.
