While selling to Employee Ownership Trusts (EOT) has undoubtedly become more complicated since the 2024 and 2025 Budget changes, business owners can still reap significant benefits from choosing this route to retirement, according to tax specialists at audit, tax, advisory and consulting firm Crowe.

Adam Rollason, Tax Partner in the Midlands and South West, noted that the EOT concept was borne out of a government-backed initiative, following the conclusion of The Nuttall Review, in late 2013.

“There was a low take up initially , due mainly to a lack of awareness of EOT’s generally, the perceived technical complexity associated with them, and the favourability of other options such as management buyouts (MBOs), which were considered to be a more ‘tried and tested’ solution for typical succession planning scenarios.

“Many considered that the 0% Capital Gains Tax (CGT) rate available on EOT transactions, when compared with the 10% Entrepreneurs’ Relief rate, available on most MBOs at that time, was not a big enough incentive to attract people down a largely unknown and little understood route.”

But in March 2020, the landscape changed almost overnight, when the Entrepreneurs’ Relief (now Business Asset Disposal Relief) lifetime limit was slashed from £10 million to £1 million by the then Chancellor Rishi Sunak, having the effect of increasing the tax rate differential to nearer 20% in many instances.

This inspired many business owners looking to sell up to explore EOTs as a viable alternative option.

Fast forward to the Autumn Budget of 2024, as part of which Labour’s Rachel Reeves announced the first tightening of the rules in the ten years since the EOT concept was introduced, designed primarily to prevent inflated consideration values, the use of offshore trusts, and the seller’s ability to exercise continuing control over the new trust structure following the completion of a sale transaction.

Rollason added: “The 2024 changes appeared to do little to prevent an ever-increasing number of EOT transactions, some of which were deemed to be taking place with the main intention of securing the favourable 0% rate of CGT. As a result, perhaps unexpectedly to many at the time, further changes followed in the Autumn Budget of November 2025.

“Following the enactment of the latest changes, the historic 0% rate now applies to only 50% of the qualifying gains arising on these transactions, with the remaining 50% being subject to CGT at the main rate of 24%.”

However, he pointed out that while a new effective rate of 12% makes this less appealing to some, it remains significantly better than the 18%/24% rates which will apply to most MBO transactions.

The new rules present an added complexity for many, due to the timing of the CGT liability. Whilst the consideration structure of most EOT transactions will comprise a significant amount of deferred consideration, the tax will become payable by 31 January following the end of the tax year in which the completion of the transaction takes place.

Rollason said: “While it is possible to pay the tax by instalments in certain circumstances, HMRC do expect that 50% of any consideration amounts received are used to pay the CGT liability until this has been settled in full.

“This is definitely having an impact on transaction numbers, as it limits the value of any net extraction achievable by the exiting shareholders in the short term.”

He pointed out that an EOT is therefore unlikely to be suitable for everyone in every scenario.

“It can work really well where there is a strong middle management ready to take over the reins of a profitable and financially sound  trading business.

“The concept continues to offer a competent management team a route to operational control, without them having to take on any personal liability .

“For a strong business, it can provide a phased but ultimately tax efficient exit for the owners and tailored, predictable cashflow for the trustees of  the EOT, which can in turn be used to reward the employees of the business.”

For an initial discussion on suitability, contact adam.rollason@crowe.co.uk or call 0121 812 0000.