Is an Employee Ownership Trust still worth it? The new rules explained
After their implementation under the Finance Act in 2014, Employee Ownership Trusts (EOTs) remained relatively unchanged. For a decade, they enabled businesses to transfer ownership without a third-party buyer, offering an exit strategy that preserved legacy and culture while ensuring significant Capital Gains Tax (CGT) relief for the seller.
In the Budgets 2024 and 2025, however, some of the rules around EOTs changed, particularly the advantages that once made them so attractive. Although the structure continues to offer similar benefits, its attractiveness may vary based on the seller’s goals and therefore requires careful evaluation.
In this blog, our SCF advisers aim to clarify the main changes, ensuring sellers have all the essential information to confidently move ahead.
What are the three main changes to EOT rules?
1. CGT relief has changed from 100% to 50%.
From 26 November 2025, CGT relief on shares sold to an EOT decreased from 100% to 50%, giving an effective CGT tax rate of 12%. Although this adjustment represents a major shift, it still provides a significant decrease in CGT bills. However, for sellers and owners who are drawn more to the possibility of relief than to employee benefits, the appeal may be considerably diminished.
2. The clawback period has extended from one to four years.
An arguably more significant amendment to EOT regulations in the October 2024 Budget was the extension of the timeframe during which qualifications must be maintained to secure CGT relief. The previous period of one tax year after the tax year of sale could have been as few as 367 days if the transaction was carried out 5 April, but four years after the tax year of sale represents a far more difficult challenge.
It poses a significant risk for the seller, who is required to divest more than half of their shares, and thereby give up all control. From the point of sale onwards, actions taken by the EOT trustees, the company or its management which result in a disqualifying event within the four-year vendor clawback period could potentially lead to disqualification and the forfeiture of the seller’s CGT relief.
When evaluating an EOT, sellers must now accept this possible outcome, which, in the worst-case scenario, could lead to their tax bill being treated as income and taxed similarly to dividends received.
3. Contributions to an EOT are now subject to tax.
Before the October 2024 Budget, most company contributions to an EOT were not treated as taxable distributions in the trust, particularly where they funded the original EOT share purchase and HMRC clearance had been obtained.
Since 30 October 2024, all company payments to an EOT are, by default, treated as distributions taxable on the trustees. A new statutory relief applies where those funds are being used for “qualifying acquisition costs” such as the share purchase price, repayments of vendor or other acquisition borrowing, reasonable commercial interest, stamp duty or directly related professional fees. If trustees claim this relief, those contributions are effectively exempt from tax in the EOT.
By contrast, a contribution paid by the company, that is used for non-qualifying purposes, like general trust running costs or broader employee benefits, is likely to be taxed on the trustees at dividend trust rates, potentially reducing the net amount available by around 40% at current rates.
HMRC have confirmed with our advisers that the aim of this change is to ensure contributions to EOTs are consistent with the intended purpose of long-term employee ownership. From a practical standpoint, it means that funding structures and contributions will now need closer planning, and, in some cases, consideration of other options, such as an Employee Benefit Trusts, which could offer greater tax efficiency.
“If these revised regulations had existed from the outset, and there was no awareness of the original guidelines, Employee Ownership Trusts would still be regarded as a favourable and more effective option than having none. However, when compared to the first set of rules during the initial ten years, this represents a step backward.”
-Simon Blake, SCF Partner
Are Employee Ownership Trusts still a good exit option?
Despite the considerable changes, Employee Ownership Trusts continue to serve as a practical exit strategy. The suitability of EOTs for your circumstances will depend on several considerations, including:
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CGT relief
For owners seeking tax relief benefits, the 50% CGT relief still offers superior benefits to alternative structures. It should be noted that the tax can be paid in instalments which must be agreed with HMRC and is subject to conditions.
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Flexibility
The updated rules, like the four-year clawback period and tax rules on extra contributions, make EOT structures stricter. Alternatives such as a standard MBO offer greater flexibility to sellers and buyers.
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Future certainty
If a seller wants certainty about the future, specifically around their CGT position, an EOT may no longer be a suitable option. The four-year clawback period and loss of control introduce an extended period of uncertainty post-sale.
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Employee benefits
If a seller is keen to see employee benefits, then EOTs continue to offer an effective solution.
Closing thoughts
The three changes outlined in this blog have not removed EOTs as an exit route but have clearly shifted the balance of benefits and risks. With CGT relief reduced, a longer clawback period, and contributions now taxable unless certain conditions are met, sellers need to look beyond the headline relief and carefully assess whether the structure still supports their priorities, whether that’s certainty, control, flexibility or genuine employee ownership.
In practice, we are still seeing sales to EOTs take place, just in fewer, more purpose-led cases. If you are considering an Employee Ownership Sale, now is the time to model the numbers, stress-test the four-year qualification window and compare alternatives such as an MBO or other employee structures. A well-planned approach can still deliver a successful transition, but the right answer will depend on your objectives and appetite for ongoing conditions.
If you would like to discuss your exit options under the new rules, our SCF advisers can help you assess whether an EOT still fits and what the best alternative route could look like. Contact our team using the form below.
We always recommend that you seek advice from a suitably qualified adviser before taking any action. The information in this article only serves as a guide and no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or the firm.
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