A guide to Capital Gains Tax when selling a business to an Employee Ownership Trust (EOT)

What is an Employee Ownership Trust?

An Employee Ownership Trust is a trust structure that acquires and holds a controlling interest in a company on behalf of its employees. Rather than selling to an external buyer, the owners sell their shares to the trust, which then holds those shares for the long‑term benefit of the workforce.

EOTs are most commonly used in businesses which revolve around their founders and people, especially where owners want to:

• Secure an exit without going to market.
• Preserve the company’s culture and independence.
• Reward employees collectively, rather than a small management group.

Need a more in-depth run down on EOTs? Read our up-to-date guide.

How is a sale to an EOT taxed?

Under current regulations (Section 236H of TCGA 1992 as amended by Finance Act 2026 section 35), individuals who dispose of shares to an EOT benefit from partial CGT relief. Specifically, 50% of the gain is exempt from CGT, while the remaining 50% is taxed at the standard rate. This leads to an effective CGT rate of 12% on the entire gain, with no maximum cap applied.

It is also important to note the following:

• Business Asset Disposal Relief (BADR) and Investors’ Relief do not apply to the chargeable gain of 50%.
• The exempt gain of 50% is transferred into the EOT, which means that there is a corresponding reduction of the trustees’ acquisition cost.
• If the trustees subsequently sell the shares, the previously held-over gain may become subject to tax.

Alongside CGT relief, EOT transactions may also benefit from:

• An Inheritance Tax (IHT) exemption on the transfer of shares to the EOT.
• The ability for EOT‑controlled companies to pay employees an annual income‑tax‑free bonus of up to £3,600 per annum.

While many of these are technically straightforward, some carry more risk in practice than they first appear. In particular:

• One of the most common disqualifications can stem from declining employee numbers, which inadvertently breach the 40% participation requirement.
• Issuing new shares to excluded participators can unintentionally cause the EOT to lose control by exceeding the 50% limit on trustees.
• Unexpected events which change trustee numbers can affect independence.
• The company ceasing to trade because of financial difficulty is the disqualifying event that most often catches sellers out. This is now a longer-running risk under the four-year period.

Because the EOT conditions must continue to be met for four years after the end of the tax year in which the sale occurs, ongoing compliance monitoring is crucial. We recommend an annual review to ensure the requirements are still satisfied. If a breach does occur during the clawback period, the seller’s CGT relief may be withdrawn, and the gain will become chargeable at the full rate (currently 24%).

Funding the CGT bill on an EOT sale

One of the most challenging aspects of EOT transactions is the timing mismatch between tax and cash:

• CGT is generally due on 31 January following the end of the tax year of sale e.g. if sale took place after 5 April 2026 (2026-27 tax year), CGT payment would be due in January 2028.
• EOT consideration is typically paid over several years.

Sellers therefore need to plan carefully to ensure they have sufficient liquidity when the tax bill falls due.

Options for funding CGT

Lump‑sum payment

• Where the business is cash‑rich, sellers may choose to pay the CGT upfront and clear the liability immediately. After this there is no further tax to pay. Our cash flow modelling is very important here.

HMRC instalment basis (CGT deferred scheme)

• CGT can be paid in instalments over up to eight years, broadly in line with the timing of the sale proceeds, with no interest charged. While this can be attractive in an inflationary environment, it may still require substantial payments early on depending on the receipt profile.

The CGT rate is crystallised at the time of the transaction, meaning later changes to tax rates do not alter the liability. In practice, cash flow is the more important consideration during the repayment period.

Is an EOT sale right for you?

An EOT can be a strong option where:

• The business has a capable management team to run it post‑sale.
• Owners are comfortable with deferred consideration over five to seven years.
• Legacy, culture and employee continuity matter.
• The business cashflow can absorb the 12% effective tax cost.

Compared to a trade sale, EOTs also:

• Avoid lengthy sale processes.
• Involve fewer warranties and indemnities, making the sale easier.
• Can offer flexibility to combine with MBOs, EMI schemes or other incentive structures.
• Allow for income tax free bonuses to employees up to £3,600 per annum.