TAX REFORM TESTS, BUT DOES NOT BREAK, THE APPEAL OF EMPLOYEE OWNERSHIP TRUSTS

Concerns that recent changes to Capital Gains Tax could dampen interest in Employee Ownership Trusts (EOTs) are proving largely unfounded, with deal activity continuing as founders prioritise long-term stewardship over tax optimisation.

When the November 2025 Budget confirmed that the capital gains tax exemption on qualifying EOT sales would be reduced, advisers warned that the move could undermine employee ownership as a preferred exit route for business owners. The reform ended the long-standing zero-rate treatment and introduced an effective tax charge for founders completing such transactions.

Several months on, however, advisers working at the sharp end of EOT transactions say the impact has been more muted than initially feared.

According to Chris Maslin, Founder of Go EO, most founders reassess the numbers but proceed regardless.

“In most cases, founders look at the figures, acknowledge the difference and then carry on with the process,” said Chris.

“A 12 per cent rate is of course higher than 0%, yet for many it is acceptable, particularly when an EOT already aligns with their wider goals for the business.”

Under the revised rules, founders selling to an EOT typically face an effective capital gains tax rate of around 12 per cent. While this marks a clear departure from the previous exemption, it remains comparatively modest when set against alternative exit routes, particularly when benchmarked against income tax rates.

For many sellers, tax has never been the sole driver.

“No one likes paying more tax, but most business owners selling to an EOT do it for holistic reasons, rather than looking for a ‘bigger’ price tag. They want the business to continue on, to continue to grow and to provide opportunities for their team in the future,” Chris said.

In practice, Go EO reports that very few transactions have collapsed solely as a result of the tax change. Instead, attention has shifted to a more technical challenge: the timing of tax payments.

EOT transactions are commonly funded over five to ten years, whereas capital gains tax is typically payable within 10 to 22 months of completion. This mismatch can place pressure on founders who have not yet received substantial cash proceeds from the sale.

“There is an option to pay CGT by instalments, but those instalments are sufficiently high that it rarely helps your cash flow,” Chris said. “The timing can be managed, but only if it is planned for properly rather than assumed away.”

Despite the fiscal adjustment, the structural advantages of employee ownership remain unchanged. EOTs continue to offer founders a route to exit that preserves company culture, protects jobs and ensures long-term employee participation, without introducing external buyers who may seek to reshape the business.

According to Chris, the tax reform has served less as a deterrent and more as a filter.

“There is a clearer divide now between tax-led interest and values-led decision making,” he said. “For founders who care about legacy and employees, and who go in with their eyes open on cash flow and tax timing, EOTs remain a very strong option.”