Employee Ownership Trust Sale: CGT Relief and Tax Rules 2026/27

What Is an Employee Ownership Trust?

An Employee Ownership Trust (EOT) is a special type of trust that holds shares in a company on behalf of that company's employees. EOTs were introduced by the Finance Act 2014 as a way to encourage a broader model of employee ownership, inspired in part by the success of the John Lewis Partnership.

When a business owner sells their shares to an EOT, they are effectively selling to a trust whose beneficiaries are the company's employees. The employees do not buy the shares individually -- they benefit collectively through the trust structure, which holds the shares and may distribute profits or bonuses to employees over time.

The government strongly supports this model and backed it with significant tax reliefs designed to make EOT sales attractive to business owners who want to reward their workforce and preserve the culture and independence of their business.

The Capital Gains Tax Exemption

The headline benefit of an EOT sale is the complete exemption from capital gains tax on the disposal proceeds. This relief is available under Schedule 5H of the Taxation of Chargeable Gains Act 1992 (TCGA).

For qualifying sales, this means:

• No CGT at any rate -- not 18%, 20%, 24%, or any other rate
• No requirement to use the CGT annual exempt amount of GBP3,000
• No Business Asset Disposal Relief (BADR) calculation needed (though BADR could otherwise apply at 18% for qualifying disposals)
• The entire gain is sheltered, regardless of its size

This is particularly valuable for owners of highly profitable businesses where the gain might otherwise be GBP5 million or GBP50 million. At standard CGT rates applicable to other disposals, the tax saving from an EOT sale can be enormous.

Qualifying Conditions for the CGT Exemption

The exemption does not apply automatically to every sale to an EOT. HMRC requires a strict set of conditions to be met. These were tightened significantly by the Finance Act 2023, which introduced additional safeguards to prevent abuse.

Condition 1: Qualifying Company

The company must be a trading company or the holding company of a trading group. Pure investment companies, holding companies with only passive investments, and companies whose activities are primarily non-trading do not qualify.

The 'trading' test applies at the date of the sale and looks at whether the company's activities are wholly or mainly trading in nature.

Condition 2: EOT Must Hold a Controlling Interest

The EOT must acquire a controlling interest in the company -- meaning more than 50% of the ordinary share capital, voting rights, and entitlement to profits on a winding up. A partial sale (for example, 40%) would not qualify for the full CGT exemption, though the EOT could acquire a qualifying stake over time.

The entire controlling interest must be acquired from qualifying sellers (see below) in one transaction or a series of related transactions.

Condition 3: All-Employee Benefit Requirement

The EOT must not discriminate in its terms or operation. The trust must operate for the benefit of all eligible employees on the same terms. The only permitted distinctions are based on:

• Length of service
• Remuneration level
• Hours worked

The trust cannot benefit only senior employees or directors. This 'all-employee' principle is fundamental to the EOT model and HMRC will scrutinise trust deeds and operation carefully.

Condition 4: Number of Participators

No more than two-fifths of the employees who benefit from the trust may be 'participators' in the company (broadly, connected persons such as former shareholders and their families). In practice, this means the trust must genuinely benefit a broader workforce, not primarily ex-owners and their relatives.

Condition 5: Trustee Board Composition (Post-April 2023)

Following the Finance Act 2023 changes, the trustee board must have a majority of independent trustees who are not former vendors or persons connected with them. This was introduced to prevent scenarios where former owners retained de facto control of the company through their role as trustees after the sale.

The independent trustees can include:

• Employee-elected trustees
• Professional independent trustees
• Non-executive trustees with no connection to the vendors

Former owners who remain as employees or directors can be trustees, but they must not form a majority of the trustee board.

Condition 6: No Disqualifying Events

Within a certain period following the sale, there must be no 'disqualifying events'. These include:

• The EOT ceasing to hold a controlling interest
• The company ceasing to be a qualifying trading company
• The trust discriminating in breach of the all-employee requirement
• Former owners regaining control

If a disqualifying event occurs within the protected period, the CGT exemption may be clawed back, potentially with interest and penalties.

Qualifying Sellers

The CGT exemption applies to individuals who hold shares in the company directly. It does not automatically extend to:

• Corporate shareholders selling their holding companies
• Trustees selling shares held by other trusts
• Non-UK resident individuals (though this depends on the specific circumstances)

The selling shareholders must be UK resident (or meet specific conditions) and must hold qualifying shares at the date of sale.

Deferred Consideration and Earn-Outs

One of the most important practical points concerns deferred consideration. Because the purchase price is paid to an EOT trust (not to external buyers), the trust typically funds the purchase over time from the company's future profits. This means sellers often receive their sale proceeds in instalments over several years.

The CGT exemption applies to the full consideration -- whether received immediately or deferred -- provided the consideration is not contingent on future events. However, contingent earn-outs (where the total price depends on the company's future performance) are more complex. HMRC's view is that genuinely contingent earn-out payments may not fall within the CGT exemption as cleanly as fixed deferred consideration.

Sellers should ensure sale agreements clearly document that the consideration is a fixed sum (even if paid over time) rather than performance-dependent.

The Employee Bonus Exemption

Once a company is owned by an EOT, it can reward its employees with a highly tax-efficient bonus structure. Under the rules, EOT-owned companies can pay qualifying employees income tax-free bonuses of up to GBP3,600 per employee per tax year.

How the Bonus Works

• The bonus is exempt from income tax in the hands of the employee.
• National Insurance contributions still apply -- employees and employers pay NI on the full bonus amount in the normal way (employee at 8% or 2% depending on earnings level, employer at 13.8% above the secondary threshold of GBP5,000).
• The bonus must be paid to all eligible employees on the same terms -- again, the only permitted distinctions are service length, pay, or hours.
• The company can deduct the bonus as a business expense for corporation tax purposes.

Practical Value of the Bonus

For a company with 50 employees, paying the maximum GBP3,600 bonus to each would cost GBP180,000 plus employer NI (approximately GBP24,840 if all employees are above the NI threshold). The income tax saving to employees (at the 20% basic rate) is GBP36,000 across the workforce, and at the 40% higher rate, it is significantly more.

Over time, the cumulative benefit of annual tax-free bonuses can be a meaningful element of the EOT value proposition for employees.

Corporation Tax Position of the Company

The sale to an EOT does not directly affect the company's corporation tax position in most cases. The company continues to pay corporation tax on its profits at the normal rates -- 19% on profits up to GBP50,000, 25% on profits above GBP250,000, and marginal relief between those thresholds.

However, because the company is now owned by a trust for the benefit of employees rather than external shareholders, there is no longer pressure to pay dividends. Profits can be retained to repay the deferred consideration to the vendors, to invest in growth, or to fund employee bonuses.

When an EOT Sale May Not Be Appropriate

The EOT model has significant benefits but is not the right exit route for every business owner. It may be less suitable where:

• The owner needs immediate liquidity (an EOT sale is almost always deferred consideration)
• The company's profitability is insufficient to service the deferred payments within a reasonable period
• The owner wants to sell to a strategic acquirer who can accelerate growth or provide synergies
• There are few or no employees (the all-employee benefit requirement is difficult to meet for sole-trader conversions)
• The company is an investment holding vehicle rather than a trading business

It is also worth noting that Business Asset Disposal Relief (BADR) at 18% is available for qualifying disposals to third-party buyers, and while this is higher than the 0% EOT rate, a third-party buyer may offer a significantly higher price that makes BADR more attractive on a net-proceeds basis.

Recent Reforms and HMRC Scrutiny

The EOT space has attracted increased HMRC attention as the number of EOT transactions has grown substantially since 2020. HMRC has published updated guidance and is scrutinising structures where:

• Former owners appear to retain practical control after the sale
• The trustee board is dominated by connected persons
• The 'all-employee' principle is undermined by disproportionate benefits to senior management
• The consideration has not been properly fixed at the outset

Advisers specialising in EOT transactions recommend that any sale to an EOT be structured with detailed professional advice, careful trust deed drafting, and appropriate independent trustee involvement from the outset.

Practical Steps for Business Owners Considering an EOT Sale

Assess qualifying status early. Check whether your company meets the trading and other conditions before incurring significant advisory costs.

Engage specialist advisers. EOT sales require coordinated advice from a corporate solicitor (trust deed and share purchase agreement), a tax adviser (CGT position, stamp duty, valuation), and often an independent financial adviser for the vendors' personal position.

Establish genuine independent governance. Appoint independent trustees before the sale completes -- not after. HMRC will expect the trustee board to have been properly constituted at the time of the disposal.

Fix the consideration clearly. Ensure the sale agreement documents a fixed total consideration, even if paid in instalments. Avoid performance-related earn-out mechanisms where possible.

Communicate with employees. An EOT that employees do not understand or value undermines the entire purpose. Proactive communication, involving employees in trustee elections, and a clear plan for annual bonuses will maximise engagement.

Summary

Selling a business to an Employee Ownership Trust can deliver complete exemption from CGT on the sale proceeds, with no cap on the exempt gain. The qualifying conditions require a trading company, an EOT controlling stake, all-employee benefit, and -- since April 2023 -- a majority-independent trustee board. Deferred consideration is common, with the company repaying vendors from future profits. EOT-owned companies can pay employees up to GBP3,600 per year in income-tax-free bonuses. HMRC scrutiny is increasing, and specialist advice is essential for any EOT transaction.