What is the Capital Gains Tax exemption for selling to an Employee Ownership Trust?

Full answer

The Employee Ownership Trust (EOT) CGT exemption allows business owners to sell their company to an employee ownership trust completely free of Capital Gains Tax, regardless of the size of the gain. There is no upper limit, which makes it highly attractive for owners of valuable businesses. The rules were introduced in Finance Act 2014 (sections 236H-236U TCGA 1992) and have remained broadly intact since, though anti-avoidance rules were tightened in Finance Act 2023 and 2024. Key qualifying conditions for the CGT exemption: (1) the selling shareholders must hold at least a 51% controlling interest before the sale, and immediately after the sale the EOT must hold more than 50% of the company; (2) the company must be a qualifying trading company (or holding company of a trading group) -- investment companies and property investment companies do not qualify; (3) the EOT must meet the definition of an employee ownership trust under s236H -- it must be a UK-resident trust, all employees (excluding certain excluded participators and their associates) must have equal entitlement to participate in benefits on the same terms, and the trust must not hold more than 25% of the ordinary share capital; (4) the former owners (and their associates) must not retain more than a 25% interest in the company after the disposal -- the "independence requirement"; (5) the sale must be to the EOT directly (not via an intermediary); (6) there is no minimum holding period before sale. Additional benefits: once the company is employee-owned via an EOT, it can pay each employee a tax-free annual bonus of up to GBP3,600 per year. The EOT itself does not pay Income Tax on the profits it receives from the company. The company still pays Corporation Tax normally. HMRC clearance: it is strongly advisable (though not mandatory) to seek HMRC advance clearance that the EOT meets the qualifying conditions before completion.

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