BPE Solicitors LLP (BPE) have recently advised a number of clients on selling their companies to an employee ownership trust (EOT). Selling a company to an EOT offers significant tax advantages, including CGT relief for selling shareholders and tax-free bonuses for employees, provided statutory conditions are met. These benefits can make EOTs an attractive option for succession planning, particularly when there are no interested third-party buyers or when the seller wishes to preserve the company’s culture.
Up until the November 2025 budget (Budget) shareholders selling their shares to a qualifying EOT did not pay any capital gains tax (CGT) on the disposal, with the gain being “rolled over” into the EOT’s base cost. However, in the Budget the Chancellor reduced that tax relief from 100% to 50% with immediate effect. Of course, saving tax on a disposal should not be the main reason for any transaction but, given the numerous hoops that have to be gone through to achieve the 100% tax relief, is a sale to an EOT still worth it, now that the relief is only 50%?
Advantages
Succession Planning
EOTs can create an effective means of succession planning and an alternative to the more traditional or conventional exit routes, such as a third party trade sale or a management or private equity backed buy-out.
The sale of a business to an EOT has the following additional benefits:
allowing selling shareholders to remain involved in the business;
minimal disruption to the running of the business;
a sale to an EOT is essentially an internal transaction, involving no third parties, it is therefore generally viewed as being a ‘friendly’ transaction, which is easier to negotiate (and usually costs less than a sale to a third party);
a sale to an EOT does not involve management spending much of their time managing the sale (eg answering endless due diligence enquiries) which allows them to concentrate on the business thereby avoiding the normal performance lag after completion; and
it provides an exit to the seller where there is no other interested third party and the selling shareholders only have to sell a majority stake (ie more than 50%) and can retain a direct interest in the target company post completion.
Tax Benefits (selling shareholders)
Even though the relief from CGT has been reduced from 100% to 50%, that is still a large tax saving. So, a shareholder selling his or her shares to an EOT for a gain of £1m will now be taxed (assuming they are a higher rate taxpayer) at 24% on half the gain, ie CGT of £120,000.
The only other relief worth considering is Business Asset Disposal Relief (BADR) which applies to the first £1m of any gain and reduces the CGT rate on that first £1m of gain to 14% until April 2026 when it will rise to 18%. If the shareholder did not sell to an EOT but was able to make use of BADR they would currently pay CGT of £140,000 (£180,000 if the sale takes place after 1 April 2026) on that gain of £1,000,000. Unfortunately, you cannot use BADR on the taxable portion of the gain made on the sale to the EOT.
If there was no relief available the shareholder would be charged CGT of £240,000 on the gain.
However, while the potential tax reliefs available to individuals who dispose of a controlling interest to an EOT can be very appealing, transitioning to an EOT entity can be a seismic cultural shift for a business. The tax drivers need to be carefully balanced against the future financial security and longevity of the business, which in turn may impact on sellers' ability to realise the full value from their shareholding.
Tax Benefits (ongoing employees)
Employees of a company owned by an EOT may receive annual bonuses of up to £3,600 free of income tax, though National Insurance Contributions still apply. Normal tax-advantaged share options can also be granted to such employees over shares in the EOT-owned company. However, while these can enhance employee engagement and motivation, they must be carefully structured to comply with legislative requirements.
Disadvantages
Cultural and Operational Impacts
While transitioning to an EOT model is often seen as a “friendly” transaction that preserves the company’s ethos, that transition can result in a significant shift in the company’s culture which requires careful management and engagement of employees.
The process of establishing and operating an EOT is complex and requires careful planning to ensure compliance with statutory requirements, such as the trading status and limited participation conditions of the company’s employees and former shareholders. While selling shareholders can still be involved in the running of the business on a day to day basis, the company is now owned by the EOT which has to ensure that the company is run for the benefit of all its employees. The EOT itself has to be managed by a board of which the majority of the directors have to be independent (ie not selling shareholders).
Although, once owned by the EOT, the company will be run for the benefit of the employees, in practice the benefits can take time to flow through depending on how the purchase by the EOT is funded. If the purchase is being funded by way of deferred consideration (rather than bank debt which would allow all the consideration to be settled at completion), a significant proportion of the company’s profits in the early years post-completion may be used in settling that deferred consideration and there may be insufficient profits to pay dividends to the employees until that deferred consideration has been settled.
Valuation of the Target Company
The valuation of the company is critical in EOT transactions. One of the conditions to obtaining the 50% relief from CGT is that the EOT trustees take reasonable steps to ensure they do not pay more than market value for the sale shares. So a robust and independent valuation process is required otherwise HMRC might refuse the CGT relief completely.
Overvaluation can lead to financial strain on the EOT trustee, as the trust often relies on the company’s profits to fund deferred payments to selling shareholders. If the company’s profits are insufficient, the EOT may struggle to meet its financial obligations, which could negatively impact employee benefits and the overall sustainability of the business.
If the company is overvalued then the selling shareholders will be liable to income tax in respect of the difference between that overvalue and its actual market value.
Compliance with Statutory Conditions
To qualify as an EOT and secure tax reliefs, the trust must meet specific statutory conditions, including trading status and limited participation requirements. Failure to comply with these conditions can result in the loss of tax reliefs.
Regulatory Scrutiny
Selling shareholders and target companies should be cautious about potential scrutiny from HM Revenue and Customs regarding the use of EOTs. Any perceived abuse of the tax reliefs associated with the EOT model could attract regulatory attention.
Conclusion
Selling a company to an EOT can facilitate succession planning and preserve the company’s culture while also providing substantial tax benefits. However, it also involves significant risks, including financial strain, compliance challenges, and potential cultural shifts. That said, the regulations that have to be complied with are no more onerous than those required to be complied with for a tax-advantaged share option scheme. With the right professional advice and careful planning you should be able to structure the transaction in a way that maximises the benefits while minimising the risks. Once the EOT structured sale is on that path of compliance, with proper professional advice the company and the EOT should be able to avoid the pitfalls of ceasing to comply with those regulations.
If you would like to learn more about selling your company to an EOT, please contact Kathryn King, Head of Corporate and Commercial at BPE by clicking here.
