5 min read
Employee Ownership Trusts and Capital Gains Tax
If you're considering selling your company to an Employee Ownership Trust (EOT), you may be able to claim full Capital Gains Tax relief on the sale. This means you could pay 0% tax on the gain when you dispose of your shares, making EOTs one of the most tax-efficient exit rout...
Introduction
If you're considering selling your company to an Employee Ownership Trust (EOT), you may be able to claim full Capital Gains Tax relief on the sale. This means you could pay 0% tax on the gain when you dispose of your shares, making EOTs one of the most tax-efficient exit routes available for business owners in the UK.
What is Employee Ownership Trust relief?
Employee Ownership Trust relief is a Capital Gains Tax relief that allows you to reduce your taxable gain to nil when you sell your company shares to an EOT. An Employee Ownership Trust is a specific type of trust designed to hold a controlling stake in a company on behalf of all its employees.
The relief is designed to encourage business owners to transfer ownership to their workforce, creating employee-owned businesses. When all qualifying conditions are met, you pay no Capital Gains Tax on the disposal of your shares to the EOT.
Who can claim the relief?
You can claim EOT relief if you're disposing of shares in a trading company (or the holding company of a trading group) to an Employee Ownership Trust.
The relief is available to individual shareholders. You must be selling ordinary share capital in the company.
Conditions that must be met
For EOT relief to apply, several conditions must be satisfied both at the time of the disposal and immediately after it.
The trading requirement
The company whose shares are being sold must be a trading company or the principal company of a trading group. This means the company must carry on trading activities, not primarily investment activities.
The all-employee benefit requirement
The EOT must be established for the benefit of all eligible employees of the company and any qualifying group companies. The trust cannot be restricted to benefit only certain employees or groups of employees.
The controlling interest requirement
Immediately after the disposal, the EOT must hold a controlling interest in the company. This means the trust must hold more than 50% of the ordinary share capital and be entitled to more than 50% of the profits available for distribution and more than 50% of the assets available for distribution on a winding up.
The limited participation requirement
After the disposal, no more than 40% of the total participation (shares, rights, and interests) in the company can be held by persons who are "participators" or connected with participators. This is sometimes called the "40% test" and prevents the relief being used where there's still significant direct ownership by a small group of people.
The equality requirement
The EOT must not contain provisions that have the effect of providing benefits on terms that are not the same for all employees (with certain permitted exceptions based on remuneration, hours worked, or length of service).
How much relief is available?
When all conditions are met, EOT relief reduces your taxable gain to nil. This means you pay 0% Capital Gains Tax on the disposal of shares to the EOT.
There is no limit on the amount of gain that can be relieved. This makes EOT relief more generous than many other Capital Gains Tax reliefs, which may have lifetime limits or only partial relief.
How to claim the relief
You must claim EOT relief on your Self Assessment tax return for the tax year in which you dispose of the shares.
You should report the disposal in the Capital Gains Tax section of your return and make the claim for EOT relief on the same return. You'll need to provide details of the disposal, including the proceeds, the cost of the shares, and any other relevant information.
The claim must be made by including the relevant information on your tax return by the filing deadline. For the 2025/26 tax year, paper returns must reach HMRC by 31 October 2026, and online returns must be filed by 31 January 2027.
When the conditions stop being met
The relief can be withdrawn if certain disqualifying events occur within the tax year of disposal or either of the two following tax years.
Disqualifying events include:
- The trading requirement ceasing to be met
- The EOT no longer holding a controlling interest in the company
- The limited participation requirement (40% test) being breached
- The equality requirement being breached
If a disqualifying event occurs, you become liable to pay the Capital Gains Tax that would have been due without the relief. HMRC can assess the tax within three years of the disqualifying event.
What to tell your accountant
When preparing to claim EOT relief, you should provide your accountant with:
- Details of the shares disposed of, including the date of acquisition and disposal
- The sale proceeds and any costs of disposal
- Evidence that the EOT meets all the qualifying conditions
- Confirmation from legal advisers that the trust deed complies with the EOT requirements
- Details of the company's trading activities
- Information about the shareholding structure before and after the disposal
Your accountant will need this information to correctly complete your Self Assessment return and ensure the relief is properly claimed.
Other tax considerations
While EOT relief eliminates Capital Gains Tax on the disposal, you should consider other tax matters when selling to an EOT, including how any outstanding loans or deferred consideration will be taxed, and how the transaction will be structured.
Employees of companies owned by EOTs can also receive tax-free bonuses of up to £3,600 per tax year, making employee ownership attractive for the workforce as well as the selling shareholders.
Sources
This article provides general guidance based on current HMRC rules. For advice specific to your situation, speak to your accountant.