Employee Ownership Trusts - Government reduces capital gains tax relief on employee ownership trusts in 2025 Budget
The Government has halved the capital gains tax (CGT) relief available on disposals to employee ownership trusts (EOTs), cutting relief from 100% to 50%, with immediate effect from 26 November 2025. The change, to be legislated in the Finance Bill 2025-26, follows on from previous changes introduced affecting the EOT ownership conditions which took effect from 30 October 2024 (see: Employee Ownership Trust reform – what you need to know). Some of the changes introduced in 2024, as well as this latest reduction in relief, have been introduced with a view to continuing to support genuine employee ownership and preventing abuse of the regime.
Understanding employee ownership trusts
EOTs are a type of employee ownership structure in which the EOT holds a controlling interest in a company for the benefit of its employees. Under the previous rules, individual shareholders who sold their shares to an EOT could claim a complete exemption from CGT on the disposal, provided all statutory conditions were met for the relief to apply. However, following the latest change introduced on Budget day, 50% of that gain will be treated as a chargeable gain for CGT purposes and taxed accordingly, resulting in an overall effective tax rate of up to 12%. The remaining 50% per cent will be relieved at the point of disposal with the expectation that such gain will be held over to come into charge on a future disposal by the trustees (again provided all statutory conditions are met for the relief to apply).
Impact of the 2025 budget on EOT transactions
A significant proportion of the consideration payable on a typical EOT transaction is deferred in nature and paid over a lengthy time period, to enable it to be indirectly funded by the underlying trading company or group out of free cash not otherwise required for the running of the business. The draft legislation published alongside the announcement does not provide for any specific deferral provisions relating to the payment of the CGT due and so it appears the general CGT rules governing the tax treatment of deferred consideration will apply. It remains to be seen whether specific provisions will be introduced before the draft legislation becomes law but, in its current form, prospective sellers to an EOT will need to ensure they understand exactly when and how much CGT will need to be paid in light of any proposed deferred consideration structure, so they can plan to have sufficient cash available to pay the CGT that will now fall due.
The fiscal reasoning behind the change
The Government’s Budget 2025 document (accessible here: Budget 2025 (HTML) - GOV.UK) clarifies the reasoning for the reform, stating that the relief is costing far more than expected. For example, the entire EOT regime was initially costed at less than £100 million by 2018-19, whereas the relief alone reached £600 million in 2021-22, and, absent intervention, was forecast to rise to £2 billion by 2028-29, around 20 times the original estimate.
The Government’s policy aim remains to “retain a strong incentive for employee ownership while ensuring that business owners pay their fair share of tax.” By taxing half of the gain at disposal, the Government argues it preserves a materially lower effective rate for qualifying EOT sales compared with alternative exit routes, but at a fiscal cost that is more sustainable.
What this means for business owners and future exit strategies
The change applies to disposals on or after 26 November 2025, which may provide advisers and shareholders with some reason to pause for thought where transactions are already in train. Sellers who have anticipated a nil-CGT outcome will now face a material charge on half of their gain, which could flow through to pricing, vendor funding and cash out profiles. Additionally, boards weighing an EOT against a trade sale or private equity backed MBO should re-run their comparative models, including the interaction with Business Asset Disposal Relief, earn out structuring and reinvestment alternatives.
While the Government has already tightened other EOT conditions in recent Budgets, including introducing new regulation around trustee residency, independence of the EOT from former owners, and market value safeguards, the shift from full relief to a 50% relief is the clearest signal yet that the regime is being refocused and rebalanced, and we would expect EOT transaction activity to decrease, at least initially, whilst shareholders consider if the EOT structure remains the right succession model. Of course, for shareholders for whom the EOT structure aligns fully with their values around future employee-ownership, this change is unlikely to make a material difference.
More broadly, the Autumn 2025 Budget has tightened the tax environment for investors and entrepreneurs alike. Halving capital gains tax relief on sales to employee ownership trusts (EOTs) from 100% to 50%, raising dividend tax rates by two percentage points, and extending the freeze on income tax thresholds for a further three years from 2028, will collectively increase the frictional cost of both exits and income extraction.
