Key issues from the November 2025 Budget for EOTs and owners selling to EOTs

Now that the dust has settled a little it is possible to understand how the Budget will affect new EOTs and business owners.

Clarity on Capital Gains Tax changes

The announcement in November’s Budget that Capital Gains Tax will be payable by the sellers on the capital gain made when they sell a company to an Employee Ownership Trust caught advisers unaware, as it was such a significant change a consultation should have been due.  The initial announcement was short on some detail and clarifications have been forthcoming from HMRC which we now explain.  Whilst these changes affect new EOTs from 26 November 2025 changes introduced from 30 October 2024 will apply to existing EOTs.

Changes from the November 2025 Budget

The Government rationale – it was concerned that with the significant increase in EOTs in the last few years that it would receive a diminishing tax return on sales of businesses to EOTs in the years to come; losing up to a billion pounds a year by 2030-2031

Disposal to an EOT – instead of no CGT being payable if the qualifying conditions are met when disposing of shares to an EOT from 26 November 2025, CGT will be due at 24% on 50% of an owner’s capital gains.  The CGT rate of 24% will apply to higher rate taxpayers which effectively means that an owner may be taxed at 12% on the sale price or 9% if a basic rate taxpayer.  No Business Asset Disposal Relief is available to the owner on the sale to the EOT.   

How does this compare with a sale which is not to an EOT?

An owner, who qualifies, has a lifetime Business Asset Disposal Relief (BADR) of £1m.  After that relief the owner pays at 14% on the capital gain in the tax year to 5 April 2026 and at 18% from that date on assets qualifying for the relief if a basic rate tax payer or at 24% if a higher rate taxpayer.  If an owner is a basic rate tax payer they will pay less tax on a sale to an EOT and if a higher rate they will pay less on sales over £2million otherwise they would pay the same for a non-EOT disposal.  The tax relief should be just one consideration among others in an owner’s decision.

How does this affect a subsequent sale by the EOT?

Where a company is sold to an EOT after 26 November 2025, since there will have been a crystallisation of a capital gain on 50% of the assets of the company sold to that EOT the CGT tax hit on the EOT on a subsequent sale should be less.

Can an owner who sells to an EOT pay CGT by instalments?

In most sales to an EOT the sale price is payable in instalments.    CGT can also be payable by instalments too.  CGT can be paid over eight years paying 50% of the instalment received as CGT until the tax is fully paid.   It will be essential for the owner to request payment in this way from HMRC.  This may be a helpful tool to match payments to the owner who sold to the EOT and the requirement to pay CGT.

Changes from October 2024 for EOTs created after that date

EOTs created on or after 30 October 2024 will need to make claims to HMRC for income tax relief on the payments which they receive from the trading company.   The payments to the EOT are considered distributions, but qualifying acquisition costs can be deducted from the payments.  Qualifying acquisition costs include share acquisition payments; stamp duty on the acquisition costs, costs of a valuation and legal expenses of the EOT on the acquisition, but not subsequently.

When must the claims be made?

For EOTs established between 1^st November 2024 and 5^th April 2025 the claim should ordinarily be made by 31^st January 2026.  For EOTs established after 5^th April 2025 the claim should ordinarily be made by 31^st January in the tax year following the tax year in which the EOT was established.

How do the changes from October 2024 affect EOTs where payments to the owner are still outstanding?

Some EOTs already make SA 900 tax returns to HMRC which will include the claim for relief.   HMRC has not explicitly stated that it requires claims to be made for EOTs established before that date which are receiving payments for retiring owners, but the legislation does not exempt them from this requirement.  It appears therefore that it would be prudent for such claims to be made by submitting a return.  If the EOT does not submit a tax return because the only income the EOT receives is the qualifying payment to the retiring owner and has no capital gains from selling shares then it is still possible that HMRC can ask for information about payments received by the EOT.  It is important therefore for the trustee directors of the EOT to record the income received and payments made to the former owner in the minutes of the EOT, particularly if those payments are being made by the trading company as the agent for the EOT because the EOT does not have a bank account.

If an EOT has paid off the retiring owner is it required to submit a tax return?

Where the EOT is simply holding the shares in the trading company but receives no income and makes no capital gains by selling shares it is not required to submit an annual tax return but may be requested to do so.  Bonus payments to employees of the trading company are made by the trading company and not the EOT so ordinarily the EOT receives no income once the retiring owners have been paid.  HMRC requests approximately one in eight EOTs to submit a return or provide further information about its income and expenditure. 

What happens if the business is not generating sufficient profit to pay the EOT (and owner) and is liquidated?   Can’t pay – don’t pay?

Before it got to that stage the owner, trading company and EOT would need to agree what to do, unless the Sale and Purchase Agreement contained a clause which permitted the EOT from making payments if it could not afford to do so.  This would be unusual.  However, if the company is liquidated the owner who has not received full payment can inform HMRC of the liquidation and request a re-calculation of  CGT.

Trustee directors of an EOT should beware the valuation and former owner control trap and longer claw back period

From 30 October 2024 former owners and connected persons (e.g. spouses) are restricted from being the majority of trustee directors on an EOT.   Trustee directors must also take reasonable steps to ensure that the sale price does not exceed market value.  The EOT should receive an independent valuation addressed to it.  Often this may be the only independent advice it receives since frequently EOT transition advisers act for the trading company and liaise with its owner as managing director.   These changes suggests it becomes even more important to consider having an independent trustee director on the EOT or independent legal advice for the EOT.

The claw back period  for the tax relief obtained by the former owner, if the EOT conditions for relief are broken, have been extended to the fourth tax year following the tax year of disposal, so continuing to satisfy these conditions becomes even more important.

EOT Bonus for Directors

It is important to check the provisions of the EOT bonus scheme.   The equality retirement for an EOT meant that directors (even retiring owners who remain as directors) were entitled to the EOT bonus.  Directors can now be excluded from the EOT bonus scheme.

Please ensure appropriate tax advice is taken before decisions are made.  Wrigleys Trust Administration services can assist with SA 900 returns to HMRC.   For further information please contact Malcolm Lynch at malcolm.lynch@wrigleys.co.uk

If you would like to discuss any aspect of this article further, please contact Malcolm Lynch at malcolm.lynch@wrigleys.co.uk. You can also keep up to date by following Wrigleys Solicitors on LinkedIn. 

The information in this article is necessarily of a general nature. The law stated is correct at the date (stated above) this article was first posted to our website.

Specific advice should be sought for specific situations. If you have any queries or need any legal advice please feel free to contact Wrigleys Solicitors.