How does Capital Gains Tax relief work when selling a company to an Employee Ownership Trust?

Full answer

The Employee Ownership Trust CGT relief is one of the most generous UK tax reliefs available, offering a complete 0% Capital Gains Tax exemption rather than merely a reduced rate, and has driven a significant rise in employee-owned businesses (following the well-known John Lewis Partnership model) since its introduction in 2014. **The core relief** Shareholders who sell shares in a trading company (or the holding company of a trading group) to a qualifying Employee Ownership Trust can potentially pay ZERO Capital Gains Tax on the disposal, rather than the normal 18%/24% CGT rates that would otherwise apply, provided the qualifying conditions are met both at the time of sale and for a specified period afterwards. **Key qualifying conditions** To qualify, several conditions must be satisfied: the company (or group) must be a trading company/group, not primarily an investment business; the EOT must acquire a controlling interest (more than 50%) in the company; the trust must be set up on an "all-employee" basis, meaning all eligible employees must be able to benefit from the trust on essentially the same terms (though limited, permitted differences based on factors like length of service, hours worked, or remuneration level are allowed within the rules); and former owners/certain connected persons are restricted from being trustees or from constituting more than a limited proportion of any employee-participants who might also be trustees, to preserve the arrangement's genuine employee-benefit character. **The 2-year clawback period** If the qualifying conditions cease to be met within a specified period after the sale (broadly, the tax year of the disposal and the following tax year), the CGT relief can be clawed back retrospectively, meaning the seller could end up having to pay the CGT that was originally relieved after all -- this creates an ongoing incentive for the new EOT-owned structure to maintain genuine compliance with the employee-ownership conditions, not just satisfy them at the moment of sale. **Why this structure is attractive beyond the CGT relief** Beyond the headline CGT saving, selling to an EOT is often attractive to retiring business owners because it can provide a route to sell the business without needing to find an external trade buyer or private equity purchaser (which can be difficult, time-consuming, and may not preserve the existing culture or jobs), while the deferred consideration (since EOT sales are typically funded over time from the company's own future profits, rather than the trust having independent funds to pay the full price upfront) means the seller's ongoing financial interest is tied to the company continuing to perform well after they step back. **Tax-free bonuses to employees** Separately, EOT-owned companies can pay employees an annual tax-free (Income Tax-free, though still subject to National Insurance) bonus of up to £3,600 per employee per tax year, provided this is offered to all employees on similar terms -- an additional incentive layered on top of the seller's own CGT relief. **Worked example** The founder of a successful trading company worth £5 million decides to sell a controlling stake to a newly established Employee Ownership Trust rather than to an external buyer. Provided the EOT acquires more than 50% control, all employees can benefit on similar terms, and the qualifying conditions continue to be met through the relevant clawback period, the founder pays 0% CGT on their gain from the sale -- compared with potentially over £1 million of CGT (at up to 24%) that could otherwise have been due on a sale of the same value to an external trade buyer, though the consideration is typically paid to the founder gradually over time out of the company's future profits rather than as an immediate lump sum. **Practical tip** Because the qualifying conditions are detailed and the clawback period means compliance must be maintained after the sale, specialist tax and legal advice is essential when structuring an EOT sale, both to secure the initial relief correctly and to put in place governance arrangements that keep the structure compliant afterwards.

Try the calculator