Employee Ownership Trusts and Capital Gains Tax: what you need to know
Thinking of selling your company to an employee ownership trust (EOT)?
One of the most attractive features of an EOT sale is the reduced rate of capital gains tax (CGT) available to selling shareholders. However, because EOT transactions are typically funded over time, it is crucial to understand when the tax is due and how to ensure you have the cash available to pay it.
This blog article explains how CGT works on a sale to an EOT, when payment is required, and the practical options available if sale proceeds are being paid in instalments.
Capital gains tax on a sale to an EOT
When a company is sold to an employee ownership trust, sellers are liable for capital gains tax on their total chargeable gain. Broadly, this is the difference between the value of the shares when they were acquired and the total sale price.
The key benefit is that CGT is charged at a rate of 12%, i.e. half the current headline CGT rate of 24%.
In most EOT transactions, however, the purchase price is not paid in full on completion. Instead, it is usually funded from future company profits and paid in instalments over a number of years. This raises an important question: how does a seller fund their CGT bill when much of the purchase price is deferred?
When does CGT have to be paid?
The start point is that capital gains tax must be paid by 31 January following the end of the tax year in which the sale takes place.
UK tax years run from 6 April to 5 April the following year.
So, for example, if a sale to an EOT completes in February 2026, the CGT must be paid by 31 January 2027.
The importance of the payment timetable
Unless the seller has other funds available, they will need to have received sufficient instalment payments from the EOT by the relevant 31 January deadline to meet their CGT liability.
This makes the timing and structure of the deferred consideration a critical part of planning an EOT sale.
Worked example
Rachel sells her company to an employee ownership trust for £5 million in February 2026. The purchase price is to be paid in instalments over five years.
- She receives an initial payment of £500,000 on completion, funded from surplus cash in the company.
- A further payment of £1 million is scheduled for 31 December 2026.
Rachel’s capital gains tax liability is £600,000 (12% of £5 million).
If she receives the £1 million payment as planned in December 2026, she will have sufficient funds to pay her CGT by 31 January 2027.
However, if that instalment is delayed, or if the payment schedule had been structured so that the next instalment fell after 31 January 2027 (and Rachel had no other funds available), she would not have enough cash to pay her tax on time.
As a minimum step, this makes careful planning of the payment schedule essential.
What if there aren’t enough funds to pay CGT in one tax year?
Using the example above, there are several ways Rachel could avoid or mitigate a shortfall.
Timing the completion date
The completion date of the sale determines when the tax is due for payment.
If, in the example above, Rachel had completed the sale in April 2026, after the start of the new tax year, she would have until 31 January 2028 to pay her CGT (unless she pays in instalments as above). By delaying completion by just two months, she would gain almost an extra year before the tax became payable.
In considering this, though, there is another factor she will need to consider. If an EOT disqualifying event (for example, the company ceasing to trade) happens before the end of (currently) the fourth full tax year following the date of sale, Rachel will become liable for CGT at the full 24% rate. If it is more important to Rachel to minimise the risk of a disqualifying event by minimising the length of this period than to push back the 31 January tax payment date, she would instead complete her sale just before 5 April.
Paying CGT by instalments
Rachel (or her tax adviser) can apply to HMRC to pay the CGT by instalments.
HMRC will generally agree where it is clear that a seller does not have sufficient funds available and has not yet received enough of the sale proceeds by the payment deadline.
Where CGT instalment payments are agreed:
- Rachel must pay 50% of each sale instalment received towards her CGT liability
- Payments can be spread over a maximum of eight years
- No interest is charged, provided each tax instalment is paid on time
External borrowing
In some cases, it may be possible to arrange an external loan to fund a larger initial instalment, sufficient to cover the CGT liability.
This option will not be available in every transaction, but it can be worth considering as part of a wider review of funding options.
Other possibilities
Other steps that may be considered include:
- Selling a smaller percentage of the company to the EOT initially, reducing the immediate taxable gain. Rachel would need a longer-term plan for disposing of the retained shares, which would be taxed at the full 24% rate.
- Gifting some shares to the EOT, which would reduce the taxable gain. This may be less attractive if Rachel wishes to realise full value.
At the time of writing, we are also considering potential other mitigating steps which may be available depending on individual circumstances when an EOT sale is being structured.
What if the company cannot fund all future instalment payments?
If it later becomes clear that the company is unable to fund the EOT to pay the full purchase price, the seller can ask HMRC to recalculate their CGT liability based on the amount actually received.
Any capital gains tax overpaid can then be refunded.
It’s all in the planning
The reduced rate of capital gains tax remains one of the most compelling advantages of selling to an employee ownership trust. However, because EOT transactions are typically funded over time, careful planning is essential to ensure that tax liabilities can be met when they fall due.
Payment schedules, completion timing, and alternative funding options should all be considered early in the process. Taking advice at the outset can help avoid cash-flow issues later and ensure the transaction delivers the intended benefits for both the seller and the employee owners.
Next steps?
Every EOT transaction is different, and careful structuring is key. Our experienced and trusted employee ownership team would be happy to discuss your plans with a no obligation call – contact us here.