Employee Ownership Trusts (EOTs) have become an increasingly popular succession route for business owners over the past decade.
Until now, qualifying disposals to an EOT have attracted 100% relief from Capital Gains Tax, meaning that sellers could transfer their shares tax-free.
This favourable treatment has contributed to rapid growth in EOT transactions, with HMRC reporting very high uptake in recent years. The Government’s own analysis notes that the cost of the regime has risen from under £100m in 2018-19 to around £600m in 2021-22, with projections of up to £2 billion by 2028-29 without reform.
What is changing?
Under the draft legislation published as part of the Draft Finance (No. 2) Bill, the tax relief available on a qualifying disposal to an EOT will reduce from 100% to 50% of the chargeable gain for disposals made on or after 26 November 2025.
This is a significant shift from the current full exemption that has been in place since the regime was introduced.
Why are these changes being introduced?
HMRC has publicly expressed concern about the volume of EOT transactions and the emergence of arrangements that use the structure primarily as a tax planning tool rather than as a genuine employee ownership mechanism. In last year’s Budget, the Government introduced a requirement that EOT trustees must not pay more than market value for the shares they acquire. This was designed to curb inflated or aggressive valuations in certain transactions.
The reduction in CGT relief continues this direction of travel. By reducing the tax incentive, the Government is aiming to filter out cases where the primary motivation is tax driven rather than succession or employee engagement.
What does this mean for business owners?
The policy shift may have a behavioural impact on future EOT activity. Business owners who were primarily attracted by the full CGT exemption may now reconsider their options. For example, a founder who was planning to retire and extract full value tax free might reassess whether the EOT route still delivers the desired financial outcome.
However, for owners who genuinely value the long-term legacy of their business and want employees to benefit from its continued success, the EOT structure will remain attractive. Even with relief reduced to 50%, the tax position is still more favourable than a traditional trade sale for many shareholders.
EOTs are likely to remain an important succession planning tool, although the landscape is changing. The proposed reduction in CGT relief signals a move towards aligning the regime with its original purpose, ensuring that it supports genuine employee ownership rather than tax motivated transactions.
Business owners considering an EOT should take early advice, check how the new rules may affect their position and ensure that their valuation is robust, accurate and defensible. As with any succession decision, the commercial, cultural and tax implications should be evaluated together to determine the most suitable path forward.
