An Employee Ownership Trust (EOT) is a business succession structure where a trust, set up for the benefit of a company’s employees, acquires a controlling interest (over 50%) in the company.
This model, which has grown rapidly in the UK, provides an indirect way for employees to own the business without using their own funds. It has also offered significant tax advantages for selling shareholders and employees – although today’s budget has significantly impacted their tax landscape.
What has changed?
With effect from today, 26 November 2025, the disposal of a company’s shares into an EOT is no longer tax-free. Previously, selling shareholders could transfer their shares into an EOT without incurring any Capital Gains Tax (CGT). This was a major incentive for business owners considering succession planning.
However, following today’s budget announcement, 50% of the agreed sale price will now be subject to CGT immediately, removing the full exemption that made EOTs so attractive.
Why the change?
The government has cited the escalating cost of the EOT regime as the primary reason for reform. Initially forecast to cost around £100 million when introduced in 2013, the scheme is now projected to cost £2 billion – a staggering 20 times more than expected. This level of expenditure has prompted the Treasury to act, significantly altering the tax landscape for EOT transactions.
Impact on business succession
This change raises serious questions about the future of EOTs. For many business owners, the appeal of EOTs lay in their ability to:
- Ensure business continuity.
- Reward employees by giving them a stake in the company.
- Avoid a large tax bill on exit.
Now, with half of the gain taxable, owners may feel they are effectively giving away their company while still facing a hefty tax charge. This could deter new EOT transactions and even disrupt deals already in progress.
Fairness and timing
The sudden nature of this change seems particularly unfair to any parties already undertaking a transaction but as the scheme’s purpose was to protect business continuity and not save vendors tax, it looks like some people will have an additional financial burden to contend with.
What are the alternatives?
The government states these changes will support growth, but one possible alternative to enacting an EOT and protecting jobs is liquidation, which does the exact opposite.
What’s next?
Only time will tell how this reform will reshape the EOT market. Will businesses still pursue employee ownership for cultural and continuity reasons, or will the tax hit make it unworkable? Business owners will need to reassess succession strategies in light of these changes.
The tax team here at Dafferns is here to help you navigate the complexities and help you plan your affairs accordingly. Therefore, please do not hesitate to get in contact if you require any assistance.
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