For a decade the employee ownership trust was the most tax-efficient exit available to the founder of a professional services firm. Sell a controlling stake to a qualifying EOT and the whole gain came out free of capital gains tax. Nothing else in the succession toolkit came close, and a lot of firms chose the route because of it.
That changed at the Autumn Budget 2025. For disposals made on or after 26 November 2025, the relief was cut from 100% to 50%. Half the gain is exempt; the other half is taxable at the ordinary capital gains tax rate, and neither Business Asset Disposal Relief nor Investors' Relief can be claimed against it. The stated reason was that the relief had become significantly more expensive than the government anticipated when it was introduced in 2014.
Take a founder selling a firm for a gain of £3m. Round numbers, illustrative, and ignoring the £3,000 annual exempt amount.
Under the old rules the capital gains tax bill was nil. Under the current rules, £1.5m is exempt and £1.5m is taxable. Capital gains tax from 6 April 2026 is charged at 18% within the basic rate band and 24% above it, so on a gain of this size effectively all of the taxable half falls at 24%. That is £360,000 — an effective rate of 12% across the whole £3m.
Set that against an ordinary sale of the same firm with no relief available. The whole £3m at 24% is £720,000. Business Asset Disposal Relief, charged at 18% from 6 April 2026 on qualifying gains up to the lifetime limit, softens the first slice of that but does not change the shape of it.
So the EOT still saves around £360,000 on this example. It used to save £720,000. The route has gone from free to merely advantaged, and that is a genuinely different decision. A founder choosing an EOT largely for the tax was, in effect, being paid several hundred thousand pounds to accept a slower, profit-funded exit. Half of that payment has now gone, while every non-tax feature of the structure stayed exactly where it was.
The relief cut is the headline, but it followed a set of changes that took effect for disposals on or after 30 October 2024, and those matter more to how a deal has to be built.
Read together, those four points describe a structure that has to be genuinely operated rather than merely established. A founder who sells to an EOT and stays close enough to control it has a problem. A founder who accepts a generous valuation because the trust was not going to argue has a different one. And the four-year clawback window means the conditions have to survive a period longer than most earn-outs.
The tax treatment attracts the attention, but it is rarely what determines whether an EOT works. The funding does.
An employee ownership trust almost never has cash. The purchase price is typically left outstanding and paid down over several years from the company's post-tax profits, sometimes with third-party debt covering part of it at completion. In substance the founder is being paid out of the future performance of a business they have just stopped controlling.
That exposure is the same one an internal management buyout carries, and we have set it out before in succession options for firm founders: internal succession preserves culture and rewards loyalty, but the seller usually becomes the bank. The relief cut does not change that risk. It simply reduces the compensation for taking it.
It also sharpens a comparison founders often avoid making properly. A trade or consolidator sale typically pays more of the price at completion and moves the performance risk to the buyer, at the cost of a higher tax charge and a loss of independence. An EOT keeps the firm independent and the culture intact, and asks the founder to carry the risk for longer. Both are legitimate. The point is that the tax gap between them has narrowed by half, so the non-tax arguments now have to do most of the work.
Three situations, in our view, survive the change comfortably.
Where there is no external buyer at a sensible price. Firms with heavy client concentration, a partner-dependent fee book or an awkward regulatory profile often attract weak external interest. Against a thin market, a 12% effective rate on a profit-funded sale is a reasonable outcome rather than a compromise.
Where the successor team is real. If there is a second tier already running client relationships and capable of running the firm, an EOT converts that into ownership without a competitive process. That is worth something the tax computation never captures.
Where independence is the point. Some founders will not sell into consolidation on any terms. For them the EOT was never primarily a tax structure, and a halved relief changes the price rather than the decision.
What no longer works is choosing an EOT because it was the cheapest way out. On the figures above, the difference between an EOT and an ordinary sale is now about 12 percentage points of tax — real money, but not enough to justify accepting a deferred, profit-dependent price from a team you privately doubt.
The employee ownership trust remains a serious succession route and a good outcome for a lot of firms. It is simply no longer a tax answer looking for a question. If you want to see what the alternative side of that comparison looks like, our guide to how practices are valued covers the numbers a buyer would put on the same firm.
Capital gains tax relief on a qualifying disposal of shares to an employee ownership trust was reduced from 100% to 50%, for disposals made on or after 26 November 2025. Half the gain is now exempt and half is taxable at the prevailing capital gains tax rate. It is also not possible to claim Business Asset Disposal Relief or Investors' Relief on the 50% that remains taxable, so the taxable half is charged at the ordinary rate. The government's stated reason was that the relief had become significantly more expensive than anticipated when it was introduced in 2014. Everything else about how an EOT works is unchanged.
On tax alone, yes, but by half of what it used to be. On a £3m gain, the taxable half of £1.5m at the 24% capital gains tax rate produces a charge of £360,000 — an effective rate of 12% across the whole gain. The same £3m gain on an ordinary sale, with no relief available, would be charged at 24%, or £720,000. So the EOT still saves in the region of £360,000 on that example, where before 26 November 2025 it would have saved the full £720,000. What has changed is that the tax advantage is no longer large enough to carry a decision on its own.
It depends when it happens. For disposals made on or after 30 October 2024, the vendor's relief can be clawed back if a disqualifying event occurs up to the end of the fourth tax year following the tax year in which the disposal took place. Within that window the charge lands on the person who sold the shares, not on the trust. If a disqualifying event happens after the window closes, HMRC's Capital Gains Manual treats the trustees as making a disposal and immediate reacquisition of the shares at market value, so the charge falls on the trust instead. Either way, the conditions have to be lived with for years, not signed once.
Three changes introduced from 30 October 2024 matter most to a founder planning this route. Former owners are restricted from retaining control of the employee ownership trust after the sale, which closes off the arrangement where a seller kept effective control while claiming the relief. The trustees must be UK resident, so an offshore trustee structure no longer qualifies. And the trustees must take reasonable steps to ensure they do not pay more than market value for the shares, which puts a proper, defensible valuation at the centre of the transaction rather than at the edge of it.
In most EOT transactions, from the company's own future profits. The trust rarely has cash of its own, so the purchase price is typically left outstanding as deferred consideration and paid down over several years out of post-tax profits contributed by the company, sometimes with third-party debt covering part of it up front. That is the structural point a seller has to weigh: you are usually being paid out of the performance of a business you no longer control. It is the same exposure as an internal management buyout, and it is why the quality of the successor team matters more than the headline valuation.
Sources: the reduction in capital gains tax relief on disposals to employee ownership trusts was announced at Autumn Budget 2025 and takes effect for disposals on or after 26 November 2025. The conditions applying to disposals on or after 30 October 2024, and the clawback treatment described above, are set out in HMRC's Capital Gains Manual at CG67802 and CG67861. Capital gains tax rates of 18% and 24%, and the 18% Business Asset Disposal Relief rate applying from 6 April 2026, are published on GOV.UK.
This article is general information about how employee ownership trusts are taxed and structured, not tax, legal or investment advice, and Founder Capital LLP is not authorised or regulated by the Financial Conduct Authority. Nothing here is an offer or invitation to invest; any investment opportunities we reference are available only to professional investors, certified high-net-worth individuals and self-certified sophisticated investors, are not open to retail investors, and capital is at risk and returns are not guaranteed. Your own figures and circumstances will differ, so please take specific advice from a qualified solicitor and tax adviser before you act.
