Business Sale Tax Guide · 2026/27

Employee Ownership Trust Guide UK 2026/27 — 0% CGT on Business Sale

An Employee Ownership Trust (EOT) lets you sell your business to your employees with 0% Capital Gains Tax on the entire gain. The company can then pay GBP3,600 per year tax-free to every employee. This guide covers the qualifying conditions, the sale process, ongoing requirements and how an EOT compares to other exit routes in 2026/27.

Key fact: The CGT exemption applies to all qualifying selling shareholders with no upper limit on the gain. A GBP10 million gain is just as exempt as a GBP500,000 gain, provided all conditions are met.

Last updated: 20 June 2026Last reviewed: 20 June 2026How we verify

What Is an Employee Ownership Trust?

An Employee Ownership Trust is a special type of discretionary trust that holds a controlling interest in a company on behalf of its employees. It was introduced by Finance Act 2014 as a way to encourage employee ownership, following the recommendations of the Nuttall Review of employee ownership.

Unlike direct employee share ownership (where individuals own shares), an EOT holds shares collectively. The employees do not own shares individually but benefit from the trust through bonuses, profit-sharing and the knowledge that the business is run for their long-term benefit rather than an external shareholder.

Well-known UK businesses that have converted to employee ownership include Richer Sounds, Aardman Animations and the John Lewis Partnership (which predates the EOT legislation but operates on the same principle). The model is particularly popular with professional services firms, engineering businesses and technology companies.

The CGT Exemption: Conditions in Full

The 0% CGT exemption under section 236H Taxation of Chargeable Gains Act 1992 applies when all of the following conditions are met in the tax year of the disposal:

Trading company or group: The company whose shares are sold must be a trading company or the holding company of a trading group. Investment companies or property-holding businesses do not qualify.
Controlling interest acquired: As a result of the disposal, the EOT must hold more than 50% of the ordinary share capital and more than 50% of the voting rights. The trust does not need to acquire 100% but must acquire a majority stake.
All-employee benefit requirement: The trust deed must require that benefits are provided to all eligible employees on equal terms. Variation is only allowed based on remuneration, length of service or hours worked.
No associated arrangements: There must be no arrangements under which the original owners or their associates could regain control of the company or its assets.
Individual sellers only: The exemption applies to individual shareholders. Corporate sellers and trustees selling shares cannot benefit.

Note that from 30 October 2024, new rules tighten the conditions. Trustees must now be independent (at least one trustee must not be connected with the company), and there are new rules to prevent abuse through multiple EOT sales of the same business.

The Sale Process Step by Step

A typical EOT transaction follows these stages:

Stage	What happens	Typical timeline
1. Feasibility	Owners decide EOT suits their goals; adviser engaged	1--2 months
2. Valuation	Independent market valuation of 100% of share capital	4--8 weeks
3. Trust deed drafted	Solicitors prepare EOT trust deed; trustees appointed	4--6 weeks
4. Sale agreement	Share purchase agreement signed; deferred consideration terms agreed	2--4 weeks
5. Completion	Shares transferred to EOT; initial payment (if any) made	Day 1
6. Deferred payment	Company profits distributed to trust; trust pays sellers	5--10 years

Total costs for a straightforward EOT sale typically range from GBP30,000 to GBP80,000 in legal, accounting and valuation fees, depending on complexity. This is substantially less than the fees involved in a trade sale or private equity deal.

Ongoing Requirements After the Sale

The EOT must continue to meet qualifying conditions after the sale. Failure to do so within the clawback window (broadly 4 years from the end of the tax year of the sale) can result in the CGT exemption being reversed for the original sellers.

Key ongoing obligations include:

The trust must retain a controlling interest (over 50%) in the company at all times
Benefits and bonuses paid to employees must continue to be on equal terms
No arrangements may exist (or come into existence) allowing the original sellers to reacquire control
The company must remain a trading company -- it cannot convert to an investment holding structure
The trust must file returns with HMRC each year confirming that it continues to qualify
From 30 October 2024, at least one trustee must be independent of the company and its connected persons

In practice, well-structured EOTs with experienced professional trustees rarely fall foul of the ongoing conditions. The risk is greatest where the original owners attempt to exit or restructure without taking specialist advice.

Employee Bonus Rules: GBP3,600 Tax-Free Per Year

Once a company is owned by a qualifying EOT, it can pay income tax-free and National Insurance-free bonuses to employees of up to GBP3,600 per employee per tax year. This exemption is provided by section 312A Income Tax (Earnings and Pensions) Act 2003.

The rules for EOT bonuses are:

All eligible employees must be included -- the bonus cannot be limited to selected staff
The amount paid to each employee may vary only by reference to remuneration, length of service, or hours worked
The GBP3,600 limit is per employee per year and applies across all companies in the group
Bonuses above GBP3,600 are taxable and subject to NI in the usual way
The bonus must be paid as cash; non-cash benefits do not qualify for the exemption
The former selling shareholders, if still employed, can receive the bonus like any other employee

For a company with 50 employees, the annual tax-free bonus pot is GBP180,000 (50 x GBP3,600). Compared with paying the same amount as salary, the employer saves 13.8% employer NI (GBP24,840 per year) and each employee saves income tax at their marginal rate plus 8% or 2% employee NI.

Inheritance Tax Considerations

Before the EOT sale completes, the selling shareholders hold shares in a trading company. Provided those shares have been held for at least 2 years, they qualify for Business Property Relief (BPR) at 100%, making them exempt from Inheritance Tax. If a shareholder dies before the sale completes, their estate would include the shares at market value but with a 100% BPR deduction.

After the sale, the sellers hold a right to receive deferred consideration -- effectively a loan to the company. This is a simple debt and does not qualify for BPR. The outstanding deferred consideration will form part of the seller's taxable estate. This is an important planning consideration for sellers who are older or in poor health: receiving a larger upfront payment (if possible) reduces the IHT exposure on the deferred balance.

The employees' beneficial interest in the EOT is held by the trust on a discretionary basis. Discretionary trust interests are generally excluded from beneficiaries' estates for IHT purposes, so employees do not have an IHT problem from being trust beneficiaries.

EOT vs Other Exit Routes

Exit route	CGT rate	Payment timing	Control after sale
EOT sale	0%	Deferred (5--10 years)	Trust holds control; sellers can stay as employees
Trade sale	18% / 24% (or 18% BADR)	Mostly at completion	Acquirer takes control
MBO	18% / 24% (or 18% BADR)	Mostly at completion	Management team takes control
Private equity	18% / 24% (or 18% BADR)	Mix of upfront and earn-out	PE fund takes majority stake
Gift to family	Market value CGT (holdover possible)	No proceeds received	Family member takes control

BADR (Business Asset Disposal Relief) reduces the CGT rate to 18% (from April 2025) on the first GBP1 million of qualifying lifetime gains. Even with BADR, a seller with a GBP2 million gain would pay approximately GBP180,000 in CGT on a trade sale, versus nil under an EOT route. The key trade-off is receiving cash now (trade sale) versus receiving cash over time (EOT).

FAQs

Frequently Asked Questions

What is the CGT rate when selling to an EOT?

Qualifying shareholders pay 0% Capital Gains Tax on the full gain arising from the sale of their shares to an Employee Ownership Trust. This exemption applies regardless of the size of the gain and is not subject to an annual limit. The exemption was introduced by Finance Act 2014 and applies to disposals on or after 6 April 2014. All individual selling shareholders (but not trustees or companies) can benefit, provided the other qualifying conditions are met.

Does the EOT have to pay full market value for the shares?

Yes. The EOT must acquire the shares at no more than market value, which must be determined by an independent valuation. The purchase price can be paid in instalments over several years, which is common because the EOT typically does not have the cash upfront. The deferred consideration is usually funded out of future company profits. Sellers can receive interest on any deferred payments and this is taxable income for them.

What are the key conditions the company must meet for the CGT exemption?

The company being sold must be a trading company or the holding company of a trading group. The EOT must acquire a controlling interest (more than 50% of the ordinary share capital and voting rights). The trust must be set up for the benefit of all eligible employees on the same terms (though it can vary by length of service, remuneration or hours worked). The trust must not be subject to arrangements under which the original owners or their associates could regain control of the company. The conditions must be met in the tax year of disposal.

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Who counts as an "eligible employee" for EOT purposes?

Eligible employees are all individuals employed by the company (or any company in the group) at the time the trust makes a distribution or provides a benefit. Former employees and workers engaged through personal service companies do not count. The rules require that all eligible employees participate on the same terms. Differentiation is only permitted based on remuneration, length of service, or hours worked -- not on role, seniority or any other personal characteristic. The original selling shareholders can remain as employees after the sale.

How does the GBP3,600 tax-free employee bonus work?

An EOT company can pay income tax-free bonuses of up to GBP3,600 per employee per tax year. These bonuses must be paid equally to all eligible employees (or varied only by reference to remuneration, service or hours). The GBP3,600 limit applies per employee per year across all EOT companies in a group. Amounts above GBP3,600 are subject to income tax and National Insurance in the normal way. The bonus exemption is separate from the CGT exemption on the share sale and is available every year, not just in the year of sale.

Can the selling shareholders stay involved in the business after the EOT sale?

Yes. Selling shareholders can remain as employees, directors or consultants after the sale. They can receive a salary, bonuses (including the GBP3,600 EOT bonus if they are employees) and any other employment remuneration. However, they must not be able to control the company or the trust after the sale. Former owners typically continue in management roles, which is seen as beneficial for continuity. The prohibition is on regaining ownership control, not on remaining operationally involved.

Is there any Inheritance Tax relief associated with an EOT?

The transfer of shares to an EOT can qualify for Business Property Relief (BPR) for Inheritance Tax purposes before the sale completes, provided the shares have been held for at least 2 years and the company is a qualifying trading business. After the sale, the original shareholders hold a right to deferred consideration (cash), which is a simple debt and does not qualify for BPR. However, the employees' interests in the trust are typically excluded from their estates as the trust is a discretionary trust.

What happens if the EOT conditions are breached after the sale?

If the trust ceases to meet the qualifying conditions within the period ending 4 years after the end of the tax year in which the sale occurred, HMRC can claw back the CGT exemption from the original selling shareholders. This means they would face a CGT charge as if the exemption had never applied. Typical breach events include the trust losing its controlling interest, distributions being made on non-equal terms, or arrangements being put in place allowing the original owners to reacquire control. The company is required to notify HMRC of any disqualifying events.

How is the EOT funded if it has no money at completion?

The most common structure is for the EOT to pay a small deposit at completion (sometimes just GBP1) and then pay the balance as deferred consideration funded from company profits over 5 to 10 years. The company makes cash contributions to the trust, which the trust then uses to pay the selling shareholders. Alternatively, the company may take out a bank loan at the point of sale, secured on its assets, and use the proceeds to pay the sellers immediately. Some deals combine both approaches.

How does an EOT compare to a management buyout (MBO) for a business owner?

In an MBO, the management team buys the shares using debt (bank borrowing or private equity), and the seller typically receives full payment at or near completion. The seller pays CGT at the applicable rate (currently 18% or 24% on business assets, or potentially 18% under BADR). In an EOT sale, the seller pays 0% CGT but usually receives payment over several years from company profits. An EOT is often preferable where the seller values legacy and employee welfare, the business has strong recurring profits to service deferred consideration, and the seller is willing to wait for full payment.

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Sources

About the author

James Morgan

Property & Mortgage Writer

James Morgan has been writing about UK property and mortgages since 2016. He covers the full purchase journey — affordability checks, mortgage product comparison, the deposit and loan-to-value puzzle, stamp duty (SDLT in England and Northern Ireland, LBTT in Scotland, LTT in Wales), first-time buyer reliefs, conveyancing costs, and what to expect at completion. James also writes on the landlord side: buy-to-let mortgages, the 3% additional-property SDLT surcharge, Section 24 finance-cost restriction, rental yield maths, and the practical realities of being a small private landlord in the post-2017 tax regime. He has a particular interest in the remortgage decision — when to switch product, the trade-off between rate and arrangement fee, early repayment charges, and how to read a mortgage offer document. James's mortgage worked examples are built up from the underlying amortisation schedule, not borrowed from comparison sites, and stamp-duty figures are verified band-by-band against the HMRC SDLT calculator. He writes to CalcHub's editorial standards, with primary-source citations to HMRC, Revenue Scotland and the Welsh Revenue Authority, and clear disclosure that CalcHub does not sell mortgages or take affiliate commission on regulated mortgage products.

Property journalist since 2016
UK mortgage and stamp-duty specialism (SDLT, LBTT, LTT)
Writes to CalcHub editorial standards (primary-source citation, annual review)

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Disclaimer: This guide is for information only and does not constitute tax or legal advice. EOT transactions are complex and the CGT exemption depends on all qualifying conditions being met. Always seek advice from a qualified tax adviser and solicitor before proceeding with an EOT sale.