EOT tax relief for advisers: the rules as they stand
Two changes in thirteen months rewrote the EOT regime: a package of anti-avoidance reforms from 30 October 2024, and the halving of the CGT relief from 26 November 2025. This is the position now, with the legislation, written for advisers who need to be able to discuss it credibly with a client.
The seller’s CGT position
- Relief is 50% of the gain on a qualifying disposal of shares to an EOT on or after 26 November 2025 (Autumn Budget 2025; Finance Bill 2025-26, clause 35). The relieved half is held over and comes into charge on a later disposal by the trustees.
- Effective rate: 12% for a higher- or additional-rate taxpayer (50% × 24%); 9% for gains within the basic-rate band.
- No stacking. Business Asset Disposal Relief and Investors’ Relief cannot be claimed on the same disposal.
- Against a trade sale: BADR is 18% on the first £1m of lifetime qualifying gains from 6 April 2026 (14% in 2025/26), then 24%. The EOT’s advantage narrowed from “all of it” to roughly a third to a half of the tax, depending on the gain.
- The claim is made on the seller’s return for the year of disposal, jointly with the trustees, stating consideration and employee numbers.
Sources: HMRC Capital Gains Manual CG67800 onwards · House of Commons Library, Budget 2025: Employee Ownership Trusts · Tax Adviser: Finance Bill 2025-26 clause 35.
The 30 October 2024 reforms
For disposals on or after 30 October 2024:
- Trustee residence. The trustees, as a single body of persons, must be UK resident.
- Trustee independence. Former owners and persons connected with them must not control the trust — in practice, must not be a majority of the trustees.
- Consideration requirement. The trustees must take reasonable steps to ensure the price does not exceed market value. An independent valuation is the evidence.
- Clawback extended. A disqualifying event in the four tax years following the year of disposal withdraws the seller’s relief (previously the following tax year only).
- Reporting. The relief claim must state the consideration and the number of employees.
- Clearances. HMRC no longer gives advance clearance under the transactions-in-securities rules for EOT setups.
The eight relief requirements — trading, all-employee benefit, controlling interest, limited participation (5% participators not exceeding two-fifths of employees), trustee residence, trustee independence, consideration, related disposal — are set out at CG67820. Our owner-facing summary is at Employee Ownership Trust rules.
The employees’ position
- Qualifying bonus payments of up to £3,600 per employee per tax year are exempt from income tax (ITEPA 2003 s312A) when paid by a company controlled by an EOT.
- Must be offered to all eligible employees on the same terms; may be weighted by remuneration, hours or length of service; a qualifying period of up to 12 months may be applied.
- Class 1 NICs still apply. The exemption is from income tax only.
- Directors and 5%-plus participators cannot be favoured; the participator fraction is tested for the bonus as well as the relief.
Where advisers get caught
The seller stays in control
Founders who want to keep running the trust as well as the board. Since October 2024 that fails the independence requirement and forfeits the relief.Optimistic valuations
A price above market value now fails the consideration requirement, and a repayment schedule the business cannot meet fails the client. Stress-test both.Inheritance tax not modelled
Trading shares may qualify for Business Property Relief (100% on the first £1m from April 2026, 50% above); cash and loan notes do not. An EOT can raise the estate’s IHT exposure. Model both taxes together.
Keep it current
We maintain this page as the rules move. If you want a client-ready explainer, the EOT vs trade sale comparison works the numbers through on a £4m gain, and EOTs and HMRC covers the claim and the clearance position.
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Written by Parag Patel | Strategy and Tax Planning Consultant
Parag leads the Exit Better team at JLA Accountants, advising owners on employee ownership, succession and the tax that comes with both.
About the team