How does the CGT exemption work when selling a business to an Employee Ownership Trust?

Full answer

Employee Ownership Trusts (EOTs) are a tax-efficient way to sell a business to employees. The government encourages EOT sales through a complete CGT exemption for qualifying transactions. **What is an EOT?** An EOT is a trust that holds shares in a company on behalf of all eligible employees. It is governed by trustees who represent the employees' interests. EOT-owned companies include Richer Sounds and many professional services firms. **The CGT exemption** Section 236H TCGA 1992 provides that a capital gain arising from the sale of shares to a qualifying EOT is completely exempt from CGT -- at any amount. **Qualifying conditions** 1. The EOT must acquire more than 50% of the company 2. The selling company must be a trading company or holding company of a trading group 3. All eligible employees must be able to benefit from the trust (on the same terms) 4. The number of directors/shareholders with 5%+ stakes who are employees cannot exceed 40% of total employees 5. The conditions must be met throughout the tax year of sale **Worked example** James and Lisa co-founded a software company worth £8 million (their combined cost base £100,000). They sell 100% to an EOT. Gain before exemption: £8,000,000 - £100,000 = £7,900,000 CGT at 20% (business assets): would be £1,580,000 Actual CGT payable: £0 (full EOT exemption) Net proceeds: £8,000,000 Saving vs open-market sale: approximately £1,580,000 **Income tax bonus** EOT-owned companies can pay employees an annual income tax-free bonus of up to £3,600 per employee per year. This is an additional benefit on top of the CGT exemption. **Important changes from April 2026** From April 2026, new rules tighten the conditions to prevent abuse. Sellers must not receive more than market value, and there are restrictions on distributions to former owners in the years following the sale. **Valuation** HMRC requires the sale price to be at market value -- you cannot inflate the price to extract cash tax-free. Independent valuation is strongly recommended.