Employee Ownership Trust tax: selling your company to an EOT

Selling to an Employee Ownership Trust: since 26 November 2025 only half the gain is CGT-free and BADR is lost. Plus the £3,600 income-tax-free bonus.

2026/27 tax year

Capital Gains
Company (LTD)
Employee
Employer
UK-wide

The short answer

If you sell shares in your trading company to an Employee Ownership Trust (EOT) in the tax year in which the trust acquires control of the company, the other conditions are met, and you claim the relief, half of your gain is exempt from Capital Gains Tax and the other half is taxed at the normal rates, for sales on or after 26 November 2025. Before that date the whole gain was exempt. You cannot use Business Asset Disposal Relief on the taxed half. The relief can be withdrawn if the trust breaks the conditions in any of the four tax years after the tax year of the sale. Once the company is EOT-owned it can pay every employee a bonus of up to £3,600 a year free of income tax, though not free of National Insurance.

The 50% rule is in TCGA 1992 s.236H(2A), substituted by Finance Act 2026 s.35, which "ha[s] effect in relation to disposals made on or after 26 November 2025". HMRC's helpsheet HS277 puts it plainly: "half of the gain on disposal is exempt from CGT. The remaining half of the gain is charged to CGT according to the normal rules."

For the seller: how EOT relief works

The relief is for a person other than a company (individuals, and some trustees) who disposes of ordinary shares in a company to the trustees of a settlement, where the relief requirements are met and the person makes a claim (s.236H(1)). Where it applies:

The market value rule is switched off. Section 17(1), which can substitute market value for the actual price where a disposal is not a bargain at arm's length, does not apply, so the gain is worked out on the actual price (s.236H(2)).
If there is a gain, only 50% of it is chargeable. The disposal is not a qualifying business disposal for Business Asset Disposal Relief, and the shares are treated as excluded shares for Investors' Relief (s.236H(2A)(a) to (c)).
The trustees inherit a lower base cost. Their acquisition cost is the price paid less the exempt half of your gain (s.236H(2A)(d)), so the relieved half is in effect deferred into the trust rather than written off.
If there is no gain, the disposal is treated as giving neither a gain nor a loss (s.236H(3)).

Making the claim. Nothing happens automatically. Under s.236H(7) the claim must include information identifying the trust, the company's name and registered office, the date of the disposal and the number of shares, the number of employees of the company (or of the trading group) at the time of the disposal, and the consideration, including amounts due after the disposal. HMRC says you can put this in the "Any other information" section of your tax return, and that only the chargeable 50% goes in the gains boxes of the Capital Gains Tax summary pages (HS277). If you cannot find out the number of employees, the requirement is treated as met if you took all reasonable steps and the claim says so (s.236H(7A)).

Deferred consideration. EOT purchases are often paid for over several years out of company profits. If the price is payable by instalments over a period beginning no earlier than the sale and lasting more than 18 months, you can ask HMRC to let you pay the CGT by instalments over a period of up to 8 years, ending no later than the last instalment of the price (TCGA 1992 s.280). HMRC adds that the instalments of the price must continue beyond the date the tax would otherwise be due (HS277; CG14910). HS277 says the application is made in writing to HMRC's Capital Gains Tax queries address, headed "Section 280 TCGA 1992".

The relief requirements

HMRC lists eight relief requirements in s.236H(4) (CG67820). Most must be met at the time of the sale and for the rest of that tax year.

Trustee residence. The trustees are UK resident at the disposal and for the rest of the tax year (s.236H(4)(za), for disposals on or after 30 October 2024).
Trading requirement. The company is a trading company that is not in a group, or the principal company of a trading group: its activities must not include non-trading activities "to a substantial extent" (s.236I).
All-employee benefit requirement. The trust deed must not allow the trust's property to be used other than for the benefit of all eligible employees on the same terms, must not allow loans to beneficiaries, and must not allow those terms to be amended away (s.236J). "Same terms" still allows benefits to be set by remuneration, length of service or hours worked, and a qualifying period of up to 12 months' service (s.236K). Excluded participators cannot benefit: anyone who holds, or can acquire, 5% or more of the shares or would get 5% or more of the assets on a winding-up, anyone who has been such a participator at any time since the look-back date (the start of the 10-year period ending on the later of 10 December 2013 and the day property first went into the trust), and anyone connected with them. For this purpose "connected" includes uncles, aunts, nephews and nieces (s.236J(5) to (7), s.236U(3)).
Trustee independence. Fewer than 50% of the trustees may be excluded participators, and excluded participators must not, alone or together without the other trustees, have power to control the trust: to apply its property, vary it, change the beneficiaries or appoint and remove trustees. A company trustee counts as an excluded participator if 50% or more of its directors are (s.236LA, for disposals on or after 30 October 2024). So a former owner can sit on the board of trustees but cannot be in the majority or hold the controlling powers.
Controlling interest. The trust did not hold a controlling interest at the start of the tax year of the sale, holds one at the end of it, and having got control keeps it for the rest of the year (s.236H(4)(c)). Control means more than 50% of the ordinary shares and votes, more than 50% of distributable profits and of assets on a winding-up, with no arrangement that could take this away without the trustees' consent (s.236M). HS277: relief is only available for disposals in the tax year in which the trust acquires control.
Consideration. The trustees must have taken all reasonable steps to make sure the price is not more than market value and that any interest on deferred consideration is not more than a reasonable commercial rate (s.236H(4)(ca), for disposals on or after 30 October 2024).
Limited participation (the 2/5 rule). The "participator fraction" must not exceed 2/5. It is the number of employees and office-holders who are 5% participators, plus employees connected with them, divided by the total number of employees. It must not exceed 2/5 at any time from the sale to the end of that tax year (Condition B), and it must not have exceeded 2/5 at any time in the 12 months ending just after the sale while you were a participator (Condition A). A breach of up to 6 months caused by events outside the trustees' reasonable control is ignored (s.236N). So the relief is not available where 5% shareholders and their relatives working in the business make up more than 2/5 of the employees.
No related disposal in an earlier year. The relief must not have applied to a sale by you or a connected person of shares in the same company (or group) in an earlier tax year (s.236H(4)(e) and (6)).

Clawback: the four-year watch

A disqualifying event is any of: the trustees stop being UK resident, the company stops meeting the trading requirement, the trust stops meeting the all-employee benefit, trustee independence or controlling interest requirement, the participator fraction exceeds 2/5, or the trustees act in a way the trust deed does not permit (s.236O(2)).

In any of the first four tax years after the tax year of the sale, a disqualifying event stops a claim being made from that day, and revokes a claim already made: gains are recalculated as if the claim had never been made, with no time limit on HMRC's adjustments (s.236O(3) to (5)). The seller bears this. For disposals before 30 October 2024 the watch period was only the following tax year (CG67860; Finance Act 2025 Sch 6 para 6).
After that, the first disqualifying event treats the trustees as having sold and immediately reacquired the shares at market value, so the deferred gain falls on the trust, not the seller (s.236P). Trustee non-residence is not one of the s.236P events: if the trustees stop being UK resident, the general trust exit charge applies instead, which likewise treats them as selling and reacquiring their assets at market value (TCGA 1992 s.80; s.236P(3A); CG67860).
Death of a trustee. If the trustees stop being UK resident only because a trustee dies, or the independence requirement fails only because a trustee or a director of a corporate trustee dies, the event is ignored if the requirement is met again within 6 months of the death (s.236O(2A) and (2B)). A resignation does not get this grace period (CG67860).

Illustrative example: the seller's CGT in 2026/27

An illustration, not advice. A shareholder who paid £1,000 for their shares sells them for £2,000,000 in 2026/27, giving a gain of £1,999,000. Their other income is £60,000, so no basic-rate band is left and gains outside Business Asset Disposal Relief are taxed at 24%. Each line deducts the £3,000 annual exempt amount, assumes no losses and no earlier BADR claims, and uses the 2026/27 rates from GOV.UK.

Route	Taxable gain	CGT	After CGT
Sale to an EOT, relief claimed: £999,500 chargeable, no BADR	£996,500	£239,160	£1,760,840
No EOT claim, BADR conditions met: first £1,000,000 at 18%	£1,996,000	£419,040	£1,580,960
No relief at all: all at 24%	£1,996,000	£479,040	£1,520,960

In this example the EOT claim saves £179,880 compared with a BADR sale and £239,880 compared with no relief. The comparison changes with the size of the gain, your other income, whether you have BADR allowance left, and the price a trade buyer would pay, which can differ from the market value an EOT may pay. It also leaves out the clawback risk above and the timing of deferred payments. Claiming EOT relief is a choice: you can decide not to claim. Work your own figures through the Capital Gains Tax calculator, and see the Business Asset Disposal Relief guide for the BADR conditions.

Announced at Budget 2026 (28 October 2026): the government will legislate in Finance Bill 2026-27 to cut the BADR lifetime limit from £1,000,000 to £500,000 for qualifying disposals made on or after 6 April 2027 (OOTLAR para 1.33). For disposals in 2026/27 the limit is £1,000,000. The Budget 2026 documents we checked announce no change to EOT relief itself.

For employees: the £3,600 income-tax-free bonus

A company that is indirectly owned by an EOT can pay each employee qualifying bonuses of up to £3,600 in a tax year with no income tax on them (ITEPA 2003 s.312A(2)). The limit applies per employer, but bonuses from companies in the same group share one limit (s.312A(3) and (4)). It is not free of National Insurance: HMRC says "this exemption does not extend to NICs, which follow the normal treatment for earnings" (EIM03050).

For example, a £3,600 qualifying bonus in 2026/27 to an employee who pays 20% income tax (outside Scotland) and the 8% main rate of employee NI on it saves them £720 of income tax, but £288 of employee NI is still deducted, and the employer still pays £540 of employer NI at 15% (before any Employment Allowance). See the bonus tax calculator for an ordinary bonus.

The main conditions for a qualifying bonus (s.312B):

it is paid by a company and is not regular salary or wages;
all employees are eligible, apart from those with less than a minimum service period of no more than 12 months, recent gross misconduct, and, for bonuses paid on or after 30 October 2024, directors, who may be excluded (s.312C; HMRC's EIM03053 says one or more directors can be excluded);
every participant is on the same terms, though awards may be set by remuneration, length of service or hours worked, and no participant may get nothing (s.312C(5) to (8));
the company meets the trading requirement and is controlled by an EOT that meets the all-employee benefit requirement throughout the 12 months to the payment (shortened if control was first acquired in that period);
directors and other office-holders, plus employees connected with them, make up no more than 2/5 of the employees, on the payment date and on all but at most 90 days of the 12 months to it (s.312F, s.312B(1)(e) and (4));
the company is not a service company;
it is not salary sacrifice: a bonus given in exchange for giving up other pay is excluded (s.312H);
a former employee can receive one within 12 months of leaving.

For the company and the trustees

Funding the purchase. Where the sale to the trust met the relief requirements and the company pays a distribution to the trustees to meet their acquisition costs (the price, repaying borrowing for it, commercial-rate interest, valuation fees, stamp duty and directly connected expenses), the trustees can claim to deduct those costs from the distribution for income tax, for distributions made on or after 30 October 2024 (ITTOIA 2005 s.401ZA).
The trust's own base cost is reduced by the exempt half of the seller's gain (see above), so a later sale of the company by the trust carries that deferred gain.
Keeping the conditions. Losing trading status, control, trustee independence or UK residence, or breaching the 2/5 rule, can claw back the seller's relief for four tax years. After that, any of these except loss of UK residence triggers a deemed disposal by the trustees under s.236P; loss of residence is caught by the s.80 exit charge instead. Losing trading status or the trust's control also stops the company paying income-tax-free bonuses (ITEPA 2003 s.312B(1)(c) and (d)).
Announced at Budget 2026: from 6 April 2027 the Enterprise Management Incentives exception for EOT-owned companies will be extended to companies arranging to become controlled by an EOT, so they can keep granting qualifying EMI options during the transition (OOTLAR; HMRC ERS bulletin 69). See the employee share schemes guide.

Related reading: tax on selling business shares, the UK CGT rules guide, how trusts are taxed and sole trader vs limited company (EOT relief and the bonus exemption need a company).

Frequently asked questions

Is selling a company to an Employee Ownership Trust still free of Capital Gains Tax?

Not fully. For disposals on or after 26 November 2025, Finance Act 2026 s.35 changed TCGA 1992 s.236H so that only 50% of the gain is a chargeable gain when the relief is claimed. The other half is taxed at the normal CGT rates. Disposals on or before 25 November 2025 that met the conditions were fully relieved.

Can I claim Business Asset Disposal Relief on the half of the gain that is taxed?

No. Where EOT relief is claimed on a disposal made on or after 26 November 2025, s.236H(2A)(b) says the disposal is not a qualifying business disposal for Business Asset Disposal Relief, and Investors’ Relief is excluded too. HMRC’s helpsheet HS277 says the same.

Is EOT relief automatic?

No. It applies only if you make a claim, and the claim must identify the trust, give the company name and registered office, the date and number of shares, the number of employees at the time of the disposal and the consideration, including amounts due later (s.236H(7)). HMRC says the details can go in the Any other information section of the return.

What happens if the EOT breaks the rules after the sale?

If a disqualifying event happens in any of the four tax years after the tax year of the sale, for example the trust loses control or the trustees stop being independent or UK resident, the seller’s claim is revoked and the gain is recalculated as if no claim had been made (s.236O). After that period, a later disqualifying event other than trustee non-residence instead treats the trustees as selling and reacquiring the shares at market value (s.236P); if the trustees stop being UK resident, the general trust exit charge in s.80 applies instead.

Can the former owner be a trustee of the EOT?

Yes, but as a minority. Since 30 October 2024 the trustee independence requirement in s.236LA needs fewer than 50% of the trustees to be excluded participators (broadly 5% shareholders, people who were 5% shareholders in the look-back period, and people connected with them), and those people must not control the trust on their own.

Do EOT employee bonuses pay National Insurance?

Yes. ITEPA 2003 s.312A exempts qualifying bonuses of up to £3,600 per employee per tax year from income tax only. HMRC’s manual (EIM03050) says the exemption does not extend to National Insurance, which follows the normal treatment for earnings, so employee and employer Class 1 NI are still due.