The Government announced in the 2025 Budget that capital gains tax (CGT) relief on a qualifying disposal to an EOT would be restricted to 50% on qualifying disposals made on or after 26 November 2025. Previously, qualifying transfers of shares would be eligible for 100% relief from CGT.
It was also announced in the Budget that Business Asset Disposal Relief (BADR) could not also be claimed at a rate of 14% (increasing to 18% from 6 April 2026) up to a lifetime gain allowance of £1m, on the remaining gain.
These changes therefore increased the effective rate on a qualifying disposal from 0% to 12% (based on a CGT rate of 24%).
EOT relief at 100% was introduced with effect from 6 April 2014 to help encourage indirect employee ownership of trading companies via discretionary trusts. The relief was introduced to allow continuity and allow those who helped build the business, to own part of the business, without directly having to acquire shares or use their own cash.
Attractive and achievable succession planning has always been the key primary driver for EOT transactions. They have always been seen as a simpler route for disposing of a business, especially in challenging markets where selling a company has proved difficult. The favourable tax relief on sale (and some favourable income tax benefits for the employees post sale) are obvious though and have helped make EOT sales increasingly popular in recent years.
With tax relief being reduced there has been somewhat of a slowdown in market. An example of the impact of the changes is shown in the example below.
Example
Assuming a business were to be sold for a capital gain of £2.5 million between 26 November 2025 and 5 April 2026, the tax position between selling to an EOT and an independent buyer would be as follows:
| Pre budget
(to an EOT) |
Post budget
(to an EOT) * |
Independent buyer ** | |
| EOT CGT Relief | (£2,500,000) | (£1,250,000) | £0 |
| Subject to CGT | £0 | £1,250,000 | £2,500,000 |
| Qualifying for BADR at 14% *** | £0 | £0 | £1,000,000 |
| Remaining gain at higher rate of 24% | £0 | £1,250,000 | £1,500,000 |
| Annual Exemption | £0 | (£3,000) | (£3,000) |
| CGT Due | £0 | £299,280 | £499,280 |
*Assumes full annual exemption available and higher rate taxpayer
**Assumes full annual exemption available and Full Business Asset Disposal Relief (BADR) lifetime allowance
***18% for disposals on or after 6 April 2026
Even with a significant reduction in the tax relief available, it is notable that a 12% tax rate is still more attractive than trade sales where the 14% or 18% (if BADR is available), and/or 24%, rates would apply. The key primary succession planning and employee incentivisation motivators of an EOT sale also remain unchanged. The benefits of selling to an EOT are therefore still attractive.
If you are considering your succession plans and what exit options are available to you please contact your usual advisor on 01633 810081. You may prefer to email info@kilsbywilliams.com for more general enquiries and advice.
