Reforms to the tax rules around Employee Ownership Trusts (EOTs) mean that owners considering this form of exit from their business need to be more strategic than ever before.

While some headline Capital Gains Tax (CGT) reliefs have been reduced in recent years, such as the reduction in the allowance for Business Asset Disposal Relief (BADR) to £1 million, EOTs remain one of the most compelling succession planning tools available to UK business owners.

What has changed?

There are two key developments owners considering this form of exit need to understand:

  1. CGT relief on sales to EOTs has been reduced from 100 per cent to 50 per cent of the gain
  2. HMRC has changed its approach to taxing distributions paid to EOTs

Neither removes the true value behind EOTs, but both reinforce the need more than ever for careful structuring and specialist professional advice well in advance.

CGT and EOT: Less relief, not less opportunity

Following the Autumn Budget in 2025, CGT relief on disposals into EOTs was cut in half by the Government, which means that:

  • 50 per cent of the gain remains exempt
  • 50 per cent is chargeable to CGT at the full rate of 24 per cent
  • The taxable portion cannot be offset using Business Asset Disposal Relief (BADR) or Investors’ Relief

At first glance, this looks like a material reduction. However, context matters.

With current CGT rates for 2026/27, sale proceeds into an EOT are still effectively taxed at a maximum of around 12 per cent overall.

That could be more attractive to business owners seeking alternative exit routes once commercial reality, fees, earn‑outs and deal risk are considered.

The whole of the element of the gain that is brought into charge to tax (assuming the deferred consideration is ascertainable) is taxable up front, but the consideration might be able to be payable in instalments.

HMRC have now confirmed that an application under S280 TCGA 1992 can now be made to have the tax to be paid in instalments too, provided certain conditions are met.

The changes reflect the growing use of EOTs, which is having a noticeable impact on the public purse. HMRC is clear that they were never designed to be a “tax trick”.

Instead, their true strength lies in their ability to offer controlled succession, employee engagement and flexibility. Benefits that remain unchanged.

HMRC’s new position on EOT distributions

Alongside the CGT changes, HMRC has clarified how it treats payments made by trading companies to their EOTs.

Until October 2024, HMRC generally accepted that these payments – historically referred to as “contributions” – were not taxable.

HMRC has now stated that this treatment was incorrect and that the new position is that:

  • Payments from a trading company to its EOT are now treated as distributions
  • These distributions are subject to income tax at 39.35 per cent in the EOT, unless the trustees claim a specific form of tax relief.

EOTs can claim full income tax relief on distributions received to cover acquisition costs, which broadly include:

  • Purchase consideration for the shares
  • Commercial‑rate interest on deferred consideration
  • Valuation fees linked to the original acquisition
  • Repayment of borrowing used to fund the purchase

Trustees have four years from the end of the relevant tax year to make a claim.

For most properly‑structured EOTs, this means that payments made to fund the acquisition of the business remain tax‑efficient, just as originally intended.

Payments received for non‑qualifying purposes, such as funding independent trustee fees or ongoing costs, may trigger an income tax liability and a requirement for the EOT to file a trust tax return.

However, if an EOT just wants to make a S401ZA claim that amounts received from the company are not taxable (e.g. because they are just funding deferred consideration), it must still to file an SA900 return by 31st January following the end of the tax year in which the distribution was received.

The change doesn’t provide a strong enough reason to avoid EOTs, but it is a reason to review existing structures before a distribution is made.

Here is why EOTs are still worth it

Even with reduced CGT relief and tighter HMRC scrutiny, EOTs remain uniquely powerful because they deliver benefits that no third‑party sale can replicate.

Here are just some of the many benefits to consider:

  • A viable alternative to a third‑party sale – Owners can achieve liquidity without private equity pressure, earn‑outs or loss of cultural control.
  • A genuinely flexible transition – Founders can retain influence, step back gradually, and plan succession on their own terms.
  • Talent retention and motivation – EOTs drive engagement and performance and many are now combined with share option arrangements to reward second‑tier management.
  • Long‑term business continuity – Employee‑owned businesses are proven to be more resilient, values‑driven and stable over the long term.

Let’s not forget that they are still tax-efficient.

Why EOTs remain tax‑efficient in practice

The reduction in CGT relief has understandably led some owners to question whether selling to an Employee Ownership Trust still makes financial sense.

Looked at narrowly, a move from full exemption to a partial charge feels significant.

However, the key point is that EOT taxation cannot be assessed in isolation. It needs to be viewed alongside funding mechanics, timing of proceeds and what actually happens in a third‑party sale.

Even after the Autumn 2025 changes, only half of the capital gain on a qualifying disposal is now chargeable.

That compares favourably with a conventional disposal where reliefs may be restricted, earn‑outs deferred and consideration subject to risk or performance hurdles.

Importantly, EOT transactions also allow founders to spread the receipt of proceeds over time without punitive tax consequences.

Deferred consideration paid by the company through the trust does not attract additional CGT charges as payments are made.

Once the tax position on the disposal is fixed at the point of sale, later cashflows are a funding issue rather than a tax one.

For many owners, this ability to extract value gradually, while the business continues to trade and grow, is commercially more valuable than a headline tax saving.

While HMRC has clarified that payments by a trading company to its EOT are distributions, the availability of full relief where those payments cover acquisition costs means that the core mechanics of EOT funding remain intact.

Provided the structure is correctly designed, the company can still fund the purchase of shares in a tax‑efficient way using future profits, without triggering trust‑level income tax charges.

Employee benefits reinforce the overall tax efficiency of the exit model, as the ability to pay up to £3,600 per employee per year free of income tax remains unchanged.

For businesses with a large workforce, this represents a meaningful saving compared with conventional bonus arrangements and strengthens the alignment between performance, reward and long‑term ownership.

The bottom line

The tax rules have changed, but the fundamentals of EOT haven’t.

Employee Ownership Trusts are not any less relevant than before, but they do require smarter design, better advice and clearer governance to make the most of the advantages they offer to owners and employees.

For owners prepared to plan properly, EOTs remain one of the most tax‑efficient and effective succession options available in the UK.

If you need guidance on EOTs, please speak to our tax team for advice.