What Changed in November 2025
Employee Ownership Trusts (EOTs) have been one of the fastest-growing exit routes for UK business owners since their introduction in 2014. Inspired by the John Lewis Partnership model, EOTs allow owners to sell their company to a trust held for the benefit of all employees, with the proceeds historically exempt from Capital Gains Tax entirely.
That changed on 26 November 2025. The Finance Act reduced the CGT exemption from 100% to 50%, meaning that half of the gain on a qualifying EOT sale is now taxable. At the current higher rate of 24%, the effective rate on an EOT disposal is approximately 12%.
This is still significantly lower than the 18% available through Business Asset Disposal Relief (BADR) or the 24% standard rate. But the gap has narrowed, and the question many business owners are now asking is whether the non-tax requirements of an EOT still justify the reduced tax saving.
The Tax Comparison
Consider a business owner selling their company for a gain of £3 million:
Trade sale at standard CGT rate (24%): £720,000 tax
Trade sale with BADR (18% on first £1m, 24% on rest): £660,000 tax
EOT sale (effective 12%): £360,000 tax
The EOT route still saves £300,000-£360,000 compared to a trade sale. That is a meaningful difference. But under the old rules, the EOT would have saved the full £660,000-£720,000 — a halving of the benefit.
For smaller businesses — say a £500,000 gain — the numbers are tighter:
- Trade sale with BADR: £90,000 tax
- EOT sale: £60,000 tax
- Saving: £30,000
A £30,000 tax saving is welcome, but it may not be enough to justify the complexity and constraints of an EOT if the primary motivation was tax efficiency.
What an EOT Actually Requires
An EOT is not simply a tax wrapper — it is a fundamental change in the ownership and governance of the business. Understanding what this entails is essential for any owner considering this route.
The trust must hold a controlling interest. The EOT must own more than 50% of the ordinary share capital of the company. This means the owner is giving up control, not just equity. The business will be owned by the trust, managed by trustees, and run for the benefit of all employees.
The trust must benefit all eligible employees on equal terms. EOTs cannot discriminate between employees based on seniority, length of service, or role (with limited exceptions). The benefits of ownership must be shared broadly, which means the owner cannot favour a management team or key individuals over other employees.
The purchase must be funded. The trust typically funds the acquisition from the company’s future profits. This means the business must generate sufficient cash to pay for itself over time. If the business cannot sustain the repayments, the EOT structure may not be viable.
Governance changes. An EOT requires a board of trustees that includes employee representatives. The owner may remain involved as a trustee or director, but the governance structure must genuinely reflect employee ownership.
When an EOT Still Makes Sense
Despite the reduced tax benefit, there are strong reasons to consider an EOT in the right circumstances:
Legacy and values: If you care about what happens to your business and your employees after you leave, an EOT preserves the company’s identity, culture, and employment. A trade sale to a competitor may result in job losses, relocation, or absorption into a larger entity. An EOT keeps the business intact.
No obvious buyer: Many businesses — particularly service businesses, professional practices, and niche manufacturers — do not have an obvious trade buyer. An EOT provides an exit route that does not depend on finding an external purchaser.
Management continuity: If you have a strong management team that is capable of running the business but cannot afford to buy it personally, an EOT allows them to take operational control while the trust holds ownership. The business funds its own acquisition over time.
Employee engagement: Research consistently shows that employee-owned businesses outperform their conventionally-owned peers on measures of productivity, innovation, and employee satisfaction. If your employees are already engaged and capable, formalising their ownership can accelerate these benefits.
Tax is still favourable: At 12%, an EOT remains the most tax-efficient exit route available. It is cheaper than BADR (18%), significantly cheaper than a standard disposal (24%), and avoids the complexity of holdover relief or lifetime gifting strategies.
When an EOT May Not Be Right
Not every business is suited to employee ownership, and the reduced tax benefit makes it more important to assess suitability honestly:
Founder-dependent businesses: If the business cannot function without the owner, an EOT will not solve the underlying problem. The trust will own a business that depends on someone who is leaving.
Businesses with limited cash generation: If the company cannot generate enough surplus cash to fund the purchase price over a reasonable period, the EOT may create unsustainable financial pressure.
Small employee base: For very small businesses — fewer than ten employees — the governance requirements and administrative costs of an EOT may be disproportionate to the benefits.
Owner wants maximum price: An EOT sale is typically at market value, but the funding constraint means the owner may receive payments over several years rather than a single lump sum. A trade buyer may offer a higher price, paid upfront, with earn-out provisions. If maximising the sale price is the primary objective, a trade sale may be more attractive despite the higher tax cost.
The Wider Context
The halving of EOT relief should be seen alongside the broader tightening of tax reliefs for business owners. BADR has risen from 10% to 18%. Standard CGT is now 24%. BPR is capped at £2.5 million. The overall direction of policy is to increase the tax cost of owning and disposing of a business.
In this context, an EOT at 12% is still a relative bargain. But the days of completely tax-free exits are over, and business owners need to evaluate EOTs as one option among several, weighing the tax saving against the operational, governance, and financial requirements.
What to Do Next
If you are considering an exit within the next three to five years, an EOT should be on your shortlist — but it should not be the only option you explore. The right approach is to:
- Get a professional valuation of your business
- Assess whether your employees have the capability and desire to take ownership
- Model the funding — can the business afford to pay for itself?
- Compare the net after-tax proceeds of an EOT, trade sale, and management buyout
- Consider the non-financial factors: legacy, employee welfare, and your own post-exit goals
The best exit is not always the one that pays the least tax. It is the one that achieves what you actually want — for yourself, your employees, and your business.
Interested in exploring whether an EOT could work for your business? Contact The Legacy Wills Company to discuss your options.