Autumn Budget: Reduced Capital Gains Tax Relief for Employee Ownership Trusts
The Autumn Budget introduced an important change for business owners considering selling their company to an Employee Ownership Trust (EOT). These sales have become increasingly popular in recent years as a tax-efficient and employee-focused route for succession planning.
However, the Budget confirms that the tax advantages of this option will now be reduced, raising nearly £1 billion in additional revenue.
What Has Changed?
Previously, individuals selling their shares to an EOT could benefit from full Capital Gains Tax (CGT) relief, meaning the disposal could be made without an immediate CGT charge.
The new Budget measure reduces this level of relief, increasing the CGT cost associated with transferring ownership into an EOT.
While the Budget has not removed the relief entirely, the adjustment narrows the tax gap between an EOT sale and a traditional third-party sale.
Why Is the Government Making This Change?
The existing relief has been generous, incentivising employee ownership but also leading to concerns about:
- Overuse in situations not originally intended
- Tax-motivated transactions that lacked genuine employee-ownership objectives
- Loss of revenue where substantial business disposals generated no CGT liabilities
By reducing the relief, the government aims to retain the benefits of employee ownership while limiting perceived abuse of the system.
Who Will Be Affected?
This change is particularly relevant for:
Business owners planning retirement or exit
Selling to an EOT has been a highly attractive option for those wanting to preserve company culture and provide continuity for staff.
Companies with succession challenges
Family businesses and small-to-medium enterprises that might have opted for an EOT may need to revisit their succession plans.
Advisers and stakeholders involved in ownership transitions
Corporate finance advisers, accountants and trustees will need to factor the reduced relief into planning discussions.
What Does This Mean in Real Terms?
The reduction in relief means that:
- Sellers will face higher CGT bills when transferring their ownership
- The EOT route remains available, but is less financially advantageous
- Some business owners may reconsider whether an EOT is still the best fit
- The structure of deal financing and trust arrangements may require adjustment
For companies already in the early stages of planning an EOT transition, professional advice will be crucial to assess the financial impact.
Does This Remove the Appeal of EOTs?
Not entirely.
EOTs continue to offer:
- Long-term cultural stability
- Employee ownership benefits
- Potential corporation tax advantages
- A committed governance structure
However, the financial incentive for the outgoing owner is now weaker than before, so the decision is more likely to rest on strategic or cultural grounds rather than purely tax considerations.
Planning Points for Business Owners
Business owners may wish to:
- Reassess whether an EOT remains the preferred exit route
- Compare CGT liabilities between an EOT sale and an external sale
- Review timing, as transitional provisions may matter
- Examine how financing arrangements might need to change
- Seek advice early if an exit is envisaged in the coming years
This change introduces new complexity into succession planning.
Summary
The reduction in CGT relief for EOT disposals marks a significant shift in how employee-owned business transitions will be taxed. While EOTs remain available, their financial appeal has been reduced, and sellers will face higher tax liabilities than under previous rules.
For business owners considering succession, it is now more important than ever to seek advice and compare all available options. Merranti Accounting can support you in assessing the tax implications and choosing the most suitable path for your business.
