EOT Advisory
EOT Capital Gains Tax Rules in 2026: 50% Relief Mechanics
The 50% CGT relief still makes EOTs attractive. Here is what it means in cash for typical UK sellers, with worked examples.
From 26 November 2025, qualifying Employee Ownership Trust disposals attract 50% CGT relief, not the previous 100% relief. The structure remains attractive for many owners, but the maths has shifted and the comparison with trade and MBO routes needs re-running. This guide explains what 50% relief actually means in cash, the qualifying conditions that still apply, the disqualifying-event risks, and how the route compares with alternatives after tax.
What the 50% relief actually does
On a qualifying EOT disposal on or after 26 November 2025, half of the chargeable gain is relieved from CGT. The other half is taxed at the seller's relevant CGT rate. For a higher-rate taxpayer that is currently 24% on share gains, so the effective rate on the full gain is 12%. That compares with 20 to 24% on a trade or MBO disposal (subject to BADR on the first £1m).
On a £4m gain, EOT delivers approximately £3.52m net (12% effective on £4m). A trade sale at the same headline would deliver approximately £3.06m to £3.20m net after CGT (allowing for BADR on the first £1m at 10% and the balance at 24%). The EOT advantage is roughly £350k to £450k of post-tax cash on that profile.
The qualifying conditions that still apply
Four conditions must be met for the relief. First, the trustee must acquire a controlling interest (over 50% of ordinary shares, voting rights, and entitlement to profits and assets). Second, the trust must operate for the benefit of all eligible employees on similar terms. Third, the seller and connected persons cannot represent more than 2/5ths of the employees benefiting from the trust. Fourth, the conditions must be maintained throughout the year of disposal and for four full tax years afterwards.
Drafting the trust deed and reviewing the corporate structure to satisfy all four conditions is the single most common reason EOT sales hit delays. Engage the EOT solicitor and tax adviser early.
Disqualifying events and CGT clawback
If a disqualifying event occurs in the four tax years after sale, the CGT relief is clawed back. The sellers become liable for the full CGT charge as if the relief had never applied. The trustees become liable thereafter.
Disqualifying events include the trust ceasing to hold a controlling interest, the all-employee benefit requirement failing, the trading status of the company ending, or the trustees acting outside the EOT requirements. Most clawbacks we see relate to ownership dilution (a subsequent partial sale or issue of shares to a new investor) or to operational changes that breach the all-employee terms.
The independent valuation requirement
The trustees must acquire the shares at no more than open market value. An independent valuation, instructed by the trustees rather than the sellers, is essential. The valuation must be supportable to HMRC if challenged, with adjusted earnings, sector comparables, and clear assumptions on deferred consideration.
We are regularly instructed by trustees specifically because of independence from the selling shareholders. Our reports are written to withstand HMRC scrutiny and include all standard valuer declarations.
Funding the EOT purchase
Most EOT deals fund 20 to 40% of the consideration on completion from bank debt, working-capital reserves, or vendor loan notes. The balance is deferred over 4 to 7 years, paid from post-tax trading cash. The valuation report sets the ceiling; the funding model sets the timetable.
The funding model must be sustainable from realistic post-tax trading cash. Aggressive funding plans that strain working capital risk distressing the business and breaching trustee duties. We model the funding alongside the valuation so the two documents reconcile.
When EOT is not the right route
EOT does not suit businesses where the realistic strategic value to a trade buyer is materially higher than open market value. It does not suit owners who need 100% cash on completion (the deferred profile is intrinsic). It does not suit businesses with inconsistent post-tax cash that cannot service the deferred consideration reliably. It does not suit owners with shareholdings under 50% who cannot deliver the controlling interest the trustee needs.
We are honest about these cases. A successful EOT depends on the business being a natural fit; forcing the structure onto an unsuitable business creates downstream pain.
Key takeaways
- 50% CGT relief applies to qualifying disposals from 26 November 2025.
- Effective CGT is around 12% versus 20 to 24% on a trade sale.
- Conditions must hold for the year of disposal and four years after.
- Independent valuation and a sustainable funding model are non-negotiable.
Frequently asked questions
Is the EOT CGT relief now 50% or still 100%?
50% on qualifying disposals on or after 26 November 2025. The previous 100% relief no longer applies.
How does the post-tax cash compare with a trade sale?
An EOT delivers an effective CGT rate of around 12% on the full gain. A trade sale typically delivers 20 to 24% (less BADR on the first £1m). EOT is usually £300k to £500k better on a £4m gain.
What is a disqualifying event?
Any breach of the EOT conditions in the four tax years after disposal, including loss of trustee control, failure of the all-employee benefit, or end of trading status. It triggers CGT clawback.
Who instructs the independent valuation?
The trustees, not the sellers. The valuer must be independent of both the company and the sellers and able to write a report supportable to HMRC.
How is the deferred consideration funded?
From post-tax trading cash over 4 to 7 years, sometimes supplemented by senior bank debt on completion. The funding model must be sustainable; aggressive plans risk trustee duty breaches.
Can I still take cash on completion in an EOT?
Typically 20 to 40% of consideration on completion, with the balance deferred. Higher upfront percentages require external debt that the business must service comfortably.
Want a real number for your business?
Free, confidential indicative valuation from the BusinessValuation.co.uk team.