The 2025 tax changes to Employee Ownership Trusts, what they mean for you

Employee Ownership Trusts (EOTs) have become an increasingly popular succession strategy for Coventry and Warwickshire businesses. They allow owners to sell a controlling interest in their company to a trust set up for the benefit of employees, thus ensuring continuity and often preserving the culture of the business.  Generous tax incentives, in particular a 100% Capital Gains Tax (CGT) relief, have driven much of this popularity.

However, the 2025 Budget introduced major reforms. These changes aim to curb misuse and reduce the financial cost to the Treasury of the EOT regime, while keeping the structure viable for genuine employee ownership transitions. 

What EOTs are and why they rose in popularity

An EOT holds a controlling interest (over 50%) in a company on behalf of all eligible employees. Unlike direct share ownership schemes, employees do not individually hold shares; the trust owns shares collectively and must act for the benefit of the employee group as a whole.

Before the 2025 reforms, owners selling a controlling stake to an EOT could qualify for full exemption from CGT. That made the route particularly attractive to founders wanting a tax efficient exit without selling to private equity or external buyers. Employees also benefited from an annual income tax free bonus, up to a capped amount, strengthening morale and engagement.

As a result, EOT transactions increased rapidly across Coventry and Warwickshire. However, with rising costs to the Treasury, and concerns about owners retaining too much control post sale, the government signalled a need for tightening.

Why the Government changed the rules

Government data showed the CGT exemption was much more expensive than initially estimated.  Additionally, policymakers were concerned that some sellers were structuring EOT deals purely for a tax advantage rather than for genuine employee ownership and sometimes retaining influence through friendly trustees or inflated valuations.

The 2025 reforms therefore seek to:

1. Reduce the £2billion fiscal cost of EOT related reliefs
2. Ensure EOTs are genuine employee benefit structures
3. Increase transparency, accountability, and UK tax residency compliance
4. Maintain the EOT option, but on more balanced terms. Rather than abolishing the relief, the government opted to scale it back and strengthen governance safeguards.

The Key Tax Changes

The biggest change is the reduction of CGT relief. Previously, this was 100% of the gain on a qualifying disposal to an EOT. However, from 26 November 2025, only 50% of the gain is exempt, the other 50% being chargeable to CGT. In addition, owners cannot claim Business Asset Disposal Relief (BADR) on the taxable portion if they choose the EOT route. This change significantly affects the after-tax proceeds for sellers, especially those with high-value businesses. 

To prevent manipulation and ensure EOTs operate as intended, several governance conditions have also been tightened since they were introduced. A majority of EOT trustees must now be independent of the former owners. This prevents owners from covertly retaining control which has been rife in the past. The trustee body must also be UK resident at the time of disposal which ensures the trust remains within the UK tax system. Transactions must reflect proper independent market valuations and inflated valuations aimed at extracting cash tax efficiently are prohibited. Additionally, deferred payments, a common part of EOT structures, must use reasonable commercial interest rates.

If an EOT breaches qualifying conditions within four years after the tax year of disposal, the seller’s relief will be withdrawn. This incentivises sellers and trustees to maintain compliance.

What hasn’t changed

Importantly, some popular features remain in place. An EOT can still pay out an annual tax free bonus of £3,600 per employee and the EOT structure remains legally intact. This means the commercial rationale for enacting one is as strong as ever, it’s just the ancillary tax benefit that has been eroded. Exiting shareholders who value legacy, culture, and employee empowerment will still find EOTs compelling, but those whose priority is maximising after-tax sale proceeds may want to explore alternative exits.

If you would like any further information, please get in touch with the Corporate Tax Team at Dafferns.