Employee Ownership Trusts – Has the Pendulum Swung Back?
For a decade, selling to an Employee Ownership Trust (EOT) was one of the most tax-efficient ways for a UK business owner to exit. Last year’s Budget took away much of that advantage. The 28 October Budget, by cutting Business Asset Disposal Relief (BADR), may have tipped the balance back. Here is what has changed and what it means for owners planning their exit.
A quick recap: what is an EOT?
An EOT is a trust that buys a controlling interest in a company and holds it on behalf of all the employees. The selling owners are usually paid over time out of the company’s future profits. The model was introduced in 2014, with generous tax reliefs to encourage businesses to move into employee ownership.
The 2025 Budget: the end of the 0% exit
Until November 2025, a qualifying sale to an EOT could be completely free of Capital Gains Tax. Owners could sell at full market value and pay nothing.
That changed in the Autumn Budget 2025, when CGT relief on qualifying EOT sales was cut from 100% to 50% with immediate effect. The reason was cost: EOT sales had become popular, and the relief was costing far more than originally expected.
The detail made it worse for sellers. From 26 November 2025, half the gain is exempt and half is chargeable, and BADR and Investors’ Relief cannot be used on the chargeable half. The taxable half is charged at the normal CGT rate, so the effective rate is about 12% on the whole gain.
For many owners this changed the maths. A trade sale using BADR suddenly looked much closer to an EOT sale. One firm summed up the mood with the headline “The ‘Free Lunch’ is Over”. Even so, many advisers concluded that the EOT remained the most tax-efficient exit for a lot of owners, and that the government wanted to keep EOTs while controlling the cost of the relief.
The 2026 Budget: BADR halved
In his budget announcement on 28 October, Chancellor John Healey cut the BADR lifetime limit from £1 million to £500,000. This comes after the BADR rate already rose to 18% in April 2026.
BADR has never been available on an EOT sale, so this cut has no effect on the tax payable on an EOT disposal. What it does is make the main alternatives more expensive.
Why the EOT looks more attractive now
Take an owner with a £2.5 million gain who pays the higher rate and has their full BADR allowance available. Assuming the main CGT rate stays at 24% and ignoring the annual exemption:
| Exit route | Tax calculation | CGT payable |
| Sale to an EOT | 50% of gain (£1.25m) at 24% | £300,000 |
| Trade sale, £1m BADR limit | £1m at 18% + £1.5m at 24% | £540,000 |
| Trade sale, new £500k BADR limit | £500k at 18% + £2m at 24% | £570,000 |
The EOT already beat a trade sale by £240,000. After this Budget, the gap is £270,000. For smaller exits the effect is proportionally larger, because a bigger share of the gain used to fall within the BADR band.
There is a second, less obvious effect. Many EOT deals involve selling a controlling stake, perhaps 51% or 75%, while the owners keep the rest. Those retained shares might later be sold to a third party using BADR. With BADR now worth less, there is a stronger case for selling the whole business to the EOT at the outset.
What about the new Founders’ Relief?
The Budget also introduced Founders’ Relief: a 10% CGT rate on up to £10 million of lifetime gains. On the example above that would be about £250,000, less than an EOT sale.
But Founders’ Relief is aimed at founders and early investors in companies that have shown “sustained high growth”, and the Treasury is consulting on the conditions. Many of the businesses that typically sell to EOTs, such as professional services firms, manufacturers, construction companies and family businesses, may not meet the test. For them, the EOT is likely to stay the most tax-efficient exit available.
How Founders’ Relief will interact with EOT relief is not yet known. Owners who might qualify for both should watch the consultation closely.
It’s not just about tax
Tax was never the only reason to choose an EOT, and the 2025 changes made that clearer. Owners choose employee ownership because it:
- protects the company’s culture, independence and local jobs
- avoids the disruption, warranties and due diligence of a trade sale
- rewards employees, who can receive annual bonuses of up to £3,600 free of income tax
- gives an exit route where there is no obvious buyer or family successor
With these changes making trade sales more expensive, these benefits now come with a stronger tax case too.
What business owners should do now
- Re-run the numbers. If you ruled out an EOT after the 2025 Budget, your comparison may now be out of date.
- Check the BADR timing. If you are part way through a trade sale, find out when the new £500,000 limit applies.
- Consider a full sale. If you were planning a partial sale to an EOT, think again about whether to keep shares back.
- Watch the Founders’ Relief consultation. It could change the picture for faster-growing businesses.
- Get the structure right. The EOT rules were tightened in 2024, covering trustee control, trustee residency and valuations, so careful structuring matters more than ever.
Talk to JPP Law
JPP Law advises business owners on exits, including sales to Employee Ownership Trusts, trade sales and management buyouts. We can help you compare your options, work through the tax and commercial issues with your accountants, and structure a transaction that stands up to HMRC scrutiny.
We offer a free initial consultation to discuss your plans, with no obligation.
Contact JPP Law today to arrange your free consultation.
