Since tax reliefs for employee ownership trusts (EOTs) were introduced in 2014, the sector has grown rapidly: there are currently nearly 3,000 employee-owned businesses in the UK.
Despite the halving of the CGT relief available on a share sale to an EOT from 100% to 50% for disposals on or after 26 November 2025, EOT sales remain a popular exit strategy for business owners.
Alongside the tax advantages of an EOT sale, the structure can:
- protect company culture and independence;
- increase employee motivation and retention (EOT-owned companies can pay income tax-free bonuses of up to £3,600 per employee per tax year); and
- support succession planning.
EOT tax relief
On a qualifying sale to an EOT, 50% of the seller’s gain is relieved from CGT. The remaining 50% is subject to CGT at 18% or 24% depending on how much of the individual’s income tax basic-rate band is available. This results in an effective CGT rate of between 9% and 12% on the whole gain.
In practice, on a substantial sale, most sellers will pay the effective 12% rate as their basic-rate band is likely to be used up.
By comparison, Business Asset Disposal Relief (BADR) has been charged at 18% since 6 April 2026 and only applies to the first £1 million of lifetime gains. The EOT exit route can be significantly more tax efficient, particularly on larger gains. BADR and Investors’ Relief are not available if EOT relief is claimed.
The CGT relief associated with EOT disposals is only available if qualifying conditions are satisfied at the time of the sale. The CGT relief can also be lost if certain qualifying conditions are subsequently breached.
What are the qualifying conditions for EOT tax relief?
Several changes to the conditions required for an EOT disposal were announced at the Autumn Budget in October 2024 and apply to disposals on or after that date. Generally, the intention was to improve governance and strengthen anti-abuse rules.
The key qualifying conditions that must apply to an EOT disposal for it to benefit from CGT relief include:
Trading requirement
The company must be a trading company or parent of a trading group.
Controlling interest
Following the sale, the EOT trustees must:
- hold more than 50% of the share capital of the company;
- control a majority of voting rights;
- be entitled to more than 50% of the company’s profits available for distribution and assets available on winding up; and
- not be subject to any provision in any agreement or instrument affecting the company under which any of the above could be changed without EOT trustee consent.
Limited participation
Employees and directors who are major shareholders (holding 5% or more of the company) and employees connected with them (together, participators) cannot make up more than 40% of the company’s total employees.
This condition must be satisfied:
- for the 12 months preceding the EOT disposal; and
- from the time of the EOT sale until the end of the fourth tax year following the disposal.
There is a grace period for breaches caused by events outside the reasonable control of the EOT trustees, provided they are rectified within six months.
All-employee benefit
All eligible employees must be entitled to benefit from the EOT, although the EOT may exclude employees with less than 12 months’ service. Benefits do not have to be the same for all employees but must be calculated by reference to specific criteria: hours worked, length of service or remuneration.
Anyone who has held 5% or more of the company at any time in the 10 years before the disposal, and persons connected with them, must be excluded from benefiting.
UK-resident trustees
A rule introduced by the October 2024 reforms requires the EOT to have UK-resident trustees.
Trustee independence
Another rule introduced by the October 2024 reforms means former owners (and persons connected with them) must not make up more than 50% of the EOT trustees or control the EOT trustee body.
Consideration and market value
The EOT trustees must take all reasonable steps to ensure that the price paid does not exceed the market value of the shares sold and that any interest on deferred consideration does not exceed a reasonable commercial rate.
What happens if the EOT conditions are breached?
Importantly, if the EOT qualifying conditions outlined above cease to be met at any time before the end of the fourth tax year following the tax year in which the disposal to the EOT was made, the sellers’ CGT relief is withdrawn. Short grace periods apply in limited cases for certain breaches.
A disqualifying event after this four-year period triggers a CGT charge on the EOT trustees rather than the sellers.
How is an EOT sale funded?
An EOT will rarely have funds of its own at the point of acquisition. In most cases, the purchase price is structured as deferred consideration, funded from the future profits of the company and paid to the selling shareholders over a period, typically four to six years.
In practice, the company makes capital contributions to the EOT trustees, who use those funds to satisfy instalment payments to the sellers. Contributions used to fund the purchase price (and interest at a reasonable commercial rate) are not treated as distributions for tax purposes.
What are the risks of deferred consideration?
The sellers are, in effect, financing the EOT disposal as they have transferred ownership of the company but remain financially exposed to its ongoing trading performance until the purchase price is paid in full.
Sellers should be aware that this funding model carries inherent risk: if the company’s profits decline, payments to the sellers may be delayed or, in a worst-case scenario, the full purchase price may never be recovered.
Some transactions reduce the deferred consideration element by using third-party bank finance, but this is not common.
Speak to our EOT advisers
Paris Smith is experienced at guiding shareholders through EOT disposals. If you are considering selling your business to an employee ownership trust, please get in touch with our Corporate team to discuss the tax relief, qualifying conditions, transaction structure and potential risks.
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