What the changing tax landscape means for Employee Ownership Trusts

New changes to the tax landscape are prompting business owners to take a fresh look at their exit and succession plans, including whether an EOT (Employee Ownership Trust) transition continues to represent a more attractive route to exit compared with a more traditional trade sale or management buy-out.

Here, EOT specialist Mairead Platt outlines exactly what's changed to help you make the right strategic decisions for your future.

Reshaping the CGT landscape

Exiting shareholders of owner-managed businesses have historically been able to claim tax relief to reduce the amount of capital gains tax (CGT) paid on exit proceeds. 

First introduced as ‘Entrepreneurs Relief’ in 2008 before becoming known as ‘Business Asset Disposal Relief’ (BADR), the benefits of the relief have been steadily eroded over the past 18 years through limitations on the proceeds to which it applies, alongside increases to the rate itself.

As announced in the last Autumn Budget, 6 April 2026 saw a further reduction in BADR, with the applicable rate where BADR applies increasing from 14% to 18%. 

Separate tax reforms have reshaped the tax treatment of EOT transactions, reducing the scope of the longstanding CGT exemption available for exiting shareholders who meet the conditions.

When & how does BADR apply?

Where conditions are met, BADR applies a reduced CGT rate, subject to lifetime limit of £1m of qualifying gains. There are various conditions to be satisfied to qualify for BADR, which vary depending on the nature of the exit.

The key conditions are that:

• The relevant company must be a trading company or the holding company of a trading group of companies.
• The selling shareholder must have served as director/company secretary or employee of the company (or another company within the same group).
• The selling shareholder must have held at least 5% of the ordinary share capital and voting rights and be entitled to at least 5% of distributable profits and assets on winding up.
• These conditions must have been met for a minimum of two years preceding the date of the exit.

With the general CGT rate remaining at 18% for basic rate taxpayers and 24% for higher and additional rate taxpayers, the increase of the BADR rate to 18% has largely removed the CGT tax advantage for basic rate taxpayers and only now benefits taxpayers in the higher and additional rate brackets.  

However, whereas the relief historically delivered significant tax savings for higher and additional rate taxpayers, the differential has now reduced to just 6% — limiting the maximum additional benefit of BADR to around £60,000. 

EOT exits still more attractive than headlines suggest

While BADR (and its predecessor, Entrepreneurs Relief) has been subject to various adaptations over the years, the last Autumn Budget marked the most significant change to the tax rules governing EOT transactions since the employee‑ownership regime was introduced in 2014.

Historically, a qualifying sale to an EOT allowed selling shareholders to claim a full CGT exemption (i.e., a 0% CGT rate). However, that all changed in the Budget, with only 50% of the gain now exempt from CGT and the remaining 50% treated as the seller’s chargeable gain. In broad terms, this means that a higher rate taxpayer would pay an effective rate of CGT at 12% on a sale to an EOT. 

The change to the relief available on an EOT exit represents an inevitable recalibration to address what had become an unusually wide gap against a backdrop of a general increase in CGT since EOTs were first introduced 12 years ago. April’s further reduction of BADR is a clear example of that trend, so the relative tax position attaching to a sale to an EOT is therefore far more attractive than the headlines might suggest. 

Indeed, when EOTs were introduced, Entrepreneurs Relief allowed an individual to realise £10m of capital gains at a rate of 10% (compared with BADR today, which allows an 18% rate on only £1m of gain). Seen in the context of that evolving tax landscape, the reduction in EOT relief is more nuanced. 

For owners looking at the tax landscape today, a sale to an EOT therefore remains a highly tax-efficient route to exit.

The underlying benefits of employee ownership

Tax issues aside, a sale to an EOT remains a highly attractive succession plan for owners who wish to leave an independent business legacy enshrined within a strong employee-focused culture.

Business owners should always carefully consider the pros and cons associated with different routes to exit. Tax is just one factor among financial, ethical and personal considerations. For many business owners, employee-ownership signals a ‘lightbulb’ moment that provides the chance to achieve an enlightened exit plan that’s otherwise unachievable through more traditional routes to exit. 

With one of the largest and most active dedicated EOT teams in the UK — recognised as Specialist Advisers by the Employee Ownership Association — our experts are here to guide you through your succession strategy. 

Talk to us today by calling 0333 004 4488, emailing hello@brabners.com or completing our contact form.