Under the new rules announced in the Budget, Capital Gains Tax (CGT) relief for business owners selling shares to an Employee Ownership Trust (EOT) has been substantially reduced. Effective immediately (26 November 2025) CGT relief will be reduced from 100 per cent to 50 per cent.  The change is intended to ‘retain a strong incentive for employee ownership while ensuring business owners pay their fair share’. The government argues that the 100 per cent exemption created a route for gains ‘to go completely untapped’ when businesses were sold to EOTs and that this was more generous than originally intended. It is estimated that these changes will raise £0.9bn a year on average from 2027/28 onwards.

A sale to an EOT has become increasingly attractive to business owners due to the increasing rates of CGT, the higher rate is currently 24 per cent. The CGT rate that applies to Business asset disposal relief (BADR) has also increased to 14 per cent for disposals made on or after 6 April 2025 and will increase again to 18 per cent from 6 April 2026. The lifetime limit of £1m has remained unchanged.

The legislation for EOTs was amended in the 2024 Budget, when there was a tightening of the rules to ensure that former owners could not retain control over the EOT after sale, the Trustees were UK tax-resident and a requirement added that the Trustees take reasonable steps to ensure that the price paid does not exceed market value. The ‘clawback’ period during which the tax relief could be revoked if conditions were breached was also extended, to the end of the fourth year following disposal.

For business owners considering selling their business to an EOT, the proposition is now less tax-advantageous and therefore the decision becomes more complex. However, EOT remains a viable route to transfer ownership to employees, preserving culture, jobs and independence. There is also the added advantage of creating your own buyer and a lower level of due diligence. For a business owner, an EOT is still worth considering because an effective tax rate of 12 per cent (50 percent of 24 percent) is still lower than the rate of BADR or the main rate of CGT.