How changes to EOTs are reshaping the business exit landscape

In summary

• CGT relief on EOT sales has been halved to 50%, creating an effective tax rate of around 12% – still competitive versus other exit routes
• Immediate implementation of the changes means no transitional period, adding cashflow challenges for sellers who must fund the tax charge
• New safeguards tighten compliance, including mandatory independent valuations and a longer period for clawback of the CGT relief from sellers
• EOTs remain viable for the right businesses, offering cultural and continuity benefits beyond pure tax efficiency

The 2025 Autumn Budget introduced significant, yet surprising, changes to employee ownership trusts (EOTs), altering the tax landscape for business owners considering the increasingly popular exit route.

While EOTs remain a compelling option for owners looking to protect their legacy, support employees and retain the independence of the businesses they’ve built, the latest reforms bring new challenges and, ultimately, new considerations.

Many practitioners were taken aback by the Chancellor’s decision to revisit EOT rules so soon. After amendments in the previous Budget, most expected a period of stability. Instead, the headline announcement cut CGT relief on EOT sales from 100% to 50%, creating an effective tax rate of 12% for sellers.

Although unwelcome for some, the shift is not as punitive as it appears. Even with the reduced relief, Courtiour and Raval note that a 12% effective rate is comparatively low – and still attractive when compared with several traditional exit routes.

What complicates the picture is not the tax rate itself, but the cashflow implications it introduces. Under the previous 0% regime, owners had no tax bill to settle. Now, sellers must ensure they can fund their tax liability potentially before they have received enough proceeds to do so.

“While EOTs continue to be very tax efficient, what is not so pleasant is that now the owner will actually have a tax bill to pay, and they might not have the money from the trust to pay it,” says Courtiour. This may deter some business owners from choosing EOTs.

The rationale behind the shift appears largely fiscal. “Essentially, the government needs money. That’s why they’ve done it”, claims Raval.

Revenue pressures have intensified, and the government has sought measures that can deliver quick wins. In the government’s policy paper, it states: “This measure promotes fairness by ensuring that those who dispose of valuable shareholdings to the trustees of an EOT pay some tax on their gains, whilst retaining a significant incentive to transition companies to employee ownership by charging a lower effective rate of tax on such disposals as compared to other disposal routes.”

Perhaps more surprisingly, the changes came into effect immediately, rather than following the typical lead‑in period to April. Both Courtiour and Raval believe this was a strategic move to prevent a surge of last‑minute transactions that would have eroded the tax benefits the Treasury is seeking to capture.

This immediacy has created a line in the sand: Those who completed in time benefitted from the historic rules; those who didn’t now face the updated regime.

Even with the reduced relief, EOTs still stand favourably against business asset disposal relief (BADR), where the first £1 million of gains are taxed at 14% or 18% from April 2026 with amounts over this subject to 24% for higher rate taxpayers.

Because the EOT regime applies the tax rate to only half the gain, the effective rate for many sellers will still fall below what it would if BADR applied. “Through an EOT exit, you’re likely to still pay less tax than if you did a business trade exit”, states Courtiour.

This reinforces the point that EOTs continue to hold advantages – but only for the right business and only when the motivations extend beyond pure tax efficiency.

The recent inheritance tax adjustments, including the increased couple’s business property relief (BPR) allowance, add another dimension. With some owners able to pass on more value tax‑efficiently, there is speculation about whether owners will simply retain their businesses.

For many, the answer depends on more than tax.

Raval emphasises that IHT planning must be integrated into any EOT consideration. Shares qualifying for BPR are exempt, but the loan notes received in an EOT sale may not be. Many owners are therefore exploring insurance or other mitigation strategies to meet potential liabilities.

One driver behind the changes announced is concern about over‑valuation and transactions motivated solely by tax benefits. There has been talk of some sellers inflating valuations to maximise their payout at the company’s expense – a practice HMRC has intended to discourage.

The new rules introduce tighter safeguards, particularly around valuations and trustee responsibilities. Independent valuations are now essential to ensure the trust does not overpay for the shares it acquires.

Another notable change is the extension of the period in which HMRC can retrospectively levy the CGT on former owners if the business breaches qualifying conditions. Previously a maximum of two years, this window is now a maximum of four years, providing a stronger deterrent against poorly structured or artificially engineered EOT transitions.

Despite the reforms, Courtiour is unequivocal: “EOTs remain a strong and viable choice for many business owners, especially those motivated by long‑term stewardship, business continuity and employee involvement. Employees appreciate the independence and tend to respond well to EOTs. Some companies that have made the transition have had no leavers in a year – which is usually unheard of.”

Owners often value the independence an EOT preserves. A sale to a competitor can dilute or erase a business’s identity, while private equity investors may fundamentally change operational direction.

The EOT route also aligns well with evolving workplace culture. Younger generations tend to prioritise shared ownership models, purpose‑driven environments and long‑term incentives, says Raval.

EOTs are not the only option when exiting a business, however they are “still a very good exit strategy – for the right business”, says Raval. Traditional acquisitions, whether through trade buyers or private equity, continue to dominate the market. Management buyouts (MBOs) are also growing in popularity, particularly for businesses with strong, capable internal leadership teams.

Listings, although less common in the current climate, may also reemerge as market conditions improve.

The key message is that EOTs shouldn’t be dismissed simply because of the latest tax changes. They still offer unique cultural and commercial benefits that no other exit route provides.

The EOT landscape is changing, but the model remains compelling. The recent reforms introduce greater scrutiny, a degree of added cost and a greater emphasis on robust valuation. Yet for owners motivated by long‑term stability, employee empowerment and preserving the integrity of the businesses they built, EOTs continue to offer an attractive exit strategy.

The changes to EOTs may initially feel like a setback, but the fundamentals remain strong. A well‑structured EOT remains one of the most sustainable ways for owners to transition confidently, while rewarding the people who helped them succeed.