Employee Ownership Trusts: What Changed in November 2025

EOTs at a glance

• 50% of the gain exempt for disposals from 26 November 2025 (previously 100%).
• Effective rate around 12% for a higher rate taxpayer.
• No BADR on the taxable half, and no £1m cap on the relief either.
• Trustees must be UK resident, and former owners cannot control the board.
• Relief can be clawed back for four tax years after the year of disposal.

Table Of Contents

• What Is an Employee Ownership Trust?
• The November 2025 Change
• What an EOT Sale Costs in Tax Now
• EOT vs BADR vs Trade Sale
• The Qualifying Conditions
• How the Seller Actually Gets Paid
• The Four-Year Clawback
• Tax-Free Bonuses for Employees
• When an EOT Makes Sense
• Get Help Assessing an EOT

What Is an Employee Ownership Trust?

An EOT is a trust holding a controlling interest in a company for the benefit of all its employees. Introduced by the Finance Act 2014 and modelled loosely on the John Lewis structure, it allows an owner to sell to their workforce collectively rather than to a competitor, a private equity buyer or a management team.

The employees don’t own shares individually. The trust owns the shares on their behalf, which avoids the administrative problem of issuing and repurchasing shares as people join and leave. What employees get is a stake in the company’s future through the trust, plus the ability to receive income-tax-free bonuses.

For owners it solves a specific problem: what happens to the business and the people in it after you leave. A trade sale often means redundancies, relocation, or the business being absorbed. An EOT keeps it intact, which for many owner-managers matters as much as the price.

The trade-off is commercial rather than legal, and it’s significant: EOT sales usually pay less, and pay it later.

The November 2025 Change

At the Autumn Budget 2025, the capital gains relief on a qualifying EOT disposal was cut from 100% to 50%, with immediate effect for disposals on or after 26 November 2025. The government's stated reason was that the cost of the relief had grown significantly beyond what was expected when it was introduced in 2014.

What the change means:

• 50% of the gain is exempt. The other 50% is taxable at the normal rate, currently 24% for higher rate taxpayers.
• BADR and Investors’ Relief are blocked on the taxable half. The reliefs cannot be combined.
• Immediate effect. No transitional period, so deals in progress on 26 November 2025 were caught mid-flight.

This sits alongside a set of tightening measures from 30 October 2024: trustees must now be UK resident, former owners and connected persons cannot form a majority of the trustee board, trustees must take reasonable steps not to pay more than market value, and the clawback window was extended.

The practical consequence for anyone reading about EOTs is that a great deal of published material is now wrong. Guidance written before late 2025 describes a completely tax-free exit. That is no longer the position, and it’s the single most important thing to check the date on before relying on anything you read, including the modelling in an adviser’s pitch.

What an EOT Sale Costs in Tax Now

On a £3 million gain for a higher rate taxpayer:

	EOT (from 26 Nov 2025)	EOT (before)	BADR	No relief
Exempt	£1,500,000	£3,000,000	£1,000,000 at 18%	£0
Taxable	£1,500,000 at 24%	£0	£2,000,000 at 24%	£3,000,000 at 24%
Tax	£360,000	£0	£660,000	£720,000
Effective rate	12%	0%	22%	24%

The EOT remains the cheapest route, and the gap widens as the gain grows, because BADR is capped at £1m of lifetime gains while the 50% EOT exemption has no cap at all. On a £10m gain the EOT effective rate is still 12%, while BADR delivers an effective rate of about 23.4%.

What’s gone is the position where an EOT was simply free. A £3m gain now carries a £360,000 tax bill that didn’t exist in 2024, and that bill lands on a seller who is typically being paid in instalments over five years. The cash flow mismatch between paying tax at completion and receiving consideration over time is now a real planning issue rather than a theoretical one.

EOT vs BADR vs Trade Sale

Tax is one input. These usually matter more:

	EOT	Trade sale
Price	Usually lower, based on an independent valuation	Usually higher, competitive tension
Payment	Deferred over several years from profits	Often substantially cash at completion
Certainty of payment	Depends on future trading	Cash is cash
Effective tax rate	~12%	Up to 24%, or 18% on the first £1m with BADR
What happens to staff	Continuity	Buyer’s decision
Your involvement after	Often continues	Usually an earn-out then out
Process cost and time	Moderate, no competitive process	Higher, due diligence heavy

The honest framing: an EOT trades price and payment certainty for tax efficiency, continuity and control over the outcome. Owners who choose it usually do so because they care what happens to the business, and the tax treatment makes that choice affordable rather than driving it.

If the answer to “what happens to my staff” is “not my problem”, an EOT is probably the wrong structure, because the deferred consideration depends entirely on the business continuing to perform without you.

The Qualifying Conditions

All of these must be satisfied:

Trading requirement. The company must be a trading company or the holding company of a trading group. Property investment and investment businesses don’t qualify.

Controlling interest. The trust must acquire more than 50% of the ordinary share capital, voting rights, and entitlement to profits and assets on a winding up, and must hold it by the end of the tax year of disposal.

All-employee benefit. The trust must benefit all eligible employees on the same terms. Amounts can be varied by remuneration, length of service and hours worked, but not by seniority or discretion.

Limited participation. Broadly, the ratio of continuing shareholders who are directors or employees to the total number of employees must not exceed two fifths. This stops a structure where the same small group effectively retains control.

UK resident trustees. Required for disposals from 30 October 2024.

No majority control by former owners. Former owners and persons connected with them cannot make up a majority of the trustee board.

Market value. Trustees must take reasonable steps to ensure they don’t pay more than market value, which makes an independent valuation effectively mandatory.

How the Seller Actually Gets Paid

This is the part that surprises owners. The trust has no money of its own. It buys your shares with consideration funded, in almost all cases, from the company's future profits contributed to the trust over a number of years.

Typical structures:

• Deferred consideration from profits. The company contributes cash to the trust annually, which pays the seller in instalments. Five to seven years is common.
• Bank funding for part of the consideration at completion, with the balance deferred.
• Vendor loan notes, sometimes carrying interest.

Three consequences worth being clear-eyed about:

1. You remain exposed to the business. If trading deteriorates, the instalments may not be paid. You’ve sold the company but retained much of the risk.
2. The tax may fall due before the cash arrives. The disposal happens at completion even if payment spreads over years, and the capital gains tax follows the disposal. On the old 100% relief this rarely mattered. With a 12% effective rate on a large gain, it very much does.
3. The company must be able to afford it. Contributions to the trust come out of profits that would otherwise fund growth. Over-leveraging the deal is the most common way EOT transitions fail.

The Four-Year Clawback

Relief can be withdrawn if a disqualifying event happens by the end of the fourth tax year following the tax year of disposal. Disqualifying events include the trust ceasing to hold a controlling interest, the company ceasing to trade, or the all-employee benefit requirement being breached.

The liability falls on the seller, not the trustees. So an owner who has exited, been paid in instalments, and has no involvement in management can still face a tax charge because of decisions made by people now running the business.

Practically, sellers should take an interest in how the trust is governed after completion, and consider contractual protections. Walking away entirely on day one and assuming the tax position is settled is a mistake: it isn’t settled for four more years.

Tax-Free Bonuses for Employees

An employee-owned company can pay qualifying bonuses of up to £3,600 per employee per tax year free of income tax. National Insurance is still payable, by both employee and employer.

The conditions mirror the all-employee principle: bonuses must be available to all eligible employees on similar terms, and cannot be reserved for directors. Amounts can be varied by salary, length of service and hours worked.

For employees, £3,600 tax free is worth roughly £720 more than the same amount paid as ordinary salary to a basic rate taxpayer. It’s a genuine benefit of the structure and worth communicating properly when the transition happens, because staff often struggle to see what employee ownership means for them in concrete terms.

When an EOT Makes Sense

An EOT tends to fit where:

• You want the business to continue substantially as it is.
• There’s a management team capable of running it without you.
• The company is consistently profitable enough to fund deferred consideration.
• You’d accept a lower price for continuity and a cleaner conscience.
• The gain exceeds £1m, so BADR’s cap bites.

It tends not to fit where:

• You need cash at completion.
• The business depends on you personally, which makes deferred consideration a bad bet.
• Profits are volatile.
• There’s a trade buyer willing to pay a strategic premium that outweighs the tax difference.

That last point deserves emphasis after November 2025. The tax advantage over BADR is now roughly 10 percentage points on gains above £1m. A trade buyer paying 20% more than the independent valuation more than covers it.

Get Help Assessing an EOT

The EOT rules have changed twice in two years, both times tightening. Anything written before late 2025 describes a relief that no longer exists in that form, and a surprising amount of adviser material hasn’t been updated.

ARB Accountants works with owners weighing an exit: modelling the tax on EOT, trade sale and BADR routes against the current rules, checking the qualifying conditions, and being realistic about whether the company can actually fund deferred consideration.

Read next

• Business Asset Disposal Relief: the 18% route and its £1m cap
• How to value a business: what the trustees will be working from
• Management accounts: what a trust board needs to see monthly
• How to close a limited company: if neither sale route fits