HMRC clarifies Employee Ownership Trust (EOT) Tax changes: What sellers need to know
Key points at a glance
Background: Sellers to an EOT may now only receive exemption on 50% of the gain rather than 100%.
- HMRC has updated its guidance on claiming Capital Gains Tax (CGT) relief when selling shares to an Employee Ownership Trust (EOT).
- HMRC has clarified the treatment of deferred consideration, Business Asset Disposal Relief (BADR), and certain Employee Benefit Trust (EBT) funding arrangements.
- Further guidance is still needed on some practical aspects of the new EOT tax rules.
Following the change to the tax rules relating to EOTs announced in the 2025 Budget, HMRC has published further guidance on the taxation of Employee Ownership Trusts (EOTs) and Employee Benefit Trusts (EBTs).
The updates include revised guidance on claiming Capital Gains Tax (CGT) relief on sales of shares to an EOT, together with responses from HMRC to technical questions raised by the Employee Ownership Association (eoa), the independent membership organisation representing and advocating for employee-owned (EO) businesses across the UK.
What is HMRC’s updated EOT Capital Gains Tax guidance and how has the relief changed?
HMRC have recently updated their Help Sheet for EOT Self-Assessments on claiming relief from capital gains tax (CGT) on disposals of shares to an EOT to reflect the changes announced on 26th November 2025, including examples and guidance on how to pay the tax due by instalments.
Following the announcement, qualifying sellers transferring shares to an EOT are now entitled to relief on 50% of the capital gain, rather than the previous position where the full gain could qualify for relief.
Sellers must complete a Self-Assessment tax return including the CGT pages by 31st January following the end of the tax year in which the sale occurs.
Where the sale to the EOT was on or before 25th November 2025 and it meets the conditions for EOT relief, there will be no chargeable gain to include in the CGT summary pages.
As was previously the case, sellers still need to claim the relief (including making reference to any tax clearance obtained) and provide the information set out in the ‘How to claim relief’' section.
For EOT sales after 25th November 2025 the updated HMRC guidance explains how to include chargeable gains where there has been a claim for EOT relief and states that sellers should only include the chargeable 50% of the gain. Sellers can use the computation working sheet provided to record their tax calculations.
In terms of when the tax is due it states:
‘If the consideration ... is payable in instalments, [a seller] may apply to HMRC to pay the tax due in instalments under Section 280 Taxation of Chargeable Gains Act (TCGA) 1992. This treatment is available where the ... instalments begin no earlier than the date of disposal, extend over a period exceeding 18 months, and continue beyond the date on which the tax would otherwise be due.’
Although helpful, it is unfortunate that this explanation does not go further in explaining exactly what is required in such an application and when it can be made.
Link to the Government Help Sheet here.
EOA seeks clarity from HMRC on several issues
Separately, the EOA, put forward a number of important technical questions to HMRC after consultation with its members and specialist advisers.
Can sellers claim tax relief if deferred EOT consideration is not paid?
In most EOT transactions, the purchase price is not paid entirely on completion. Instead, a proportion is usually deferred and paid over a number of years, funded by the future profits of the company. This is known as deferred consideration.
Generally, CGT has to be paid on the full purchase price, even though a proportion (often most) of it is being deferred.
This raises the question of what happens if the seller has paid the full CGT amount but doesn’t end up receiving all the deferred consideration? It is possible to make a claim (section 48 Taxation of Chargeable Gains Act 1992) for recovery of CGT paid to reflect that some of the deferred consideration is “irrecoverable”.
HMRC has confirmed that “... where section 48 claims are accepted, the CGT liability is recalculated and the customer’s [tax self-assessment] statement is credited with any amounts of overpaid CGT”.
In practice, this means that where deferred consideration becomes irrecoverable, the sellers may be able to reclaim part of the CGT paid at completion.
This guidance doesn’t address a key question: what does “irrecoverable” mean? Does the company owned by the EOT have to be formally insolvent (e.g in liquidation)? We have seen situations where a company’s profitability permanently declines, such that in practice it will no longer ever be able to fund its EOT to make further purchase price payments, but it still carries on trading and providing jobs.
Is it HMRC’s view that in such situations the company would need to cease trading and be wound up for a seller to request a refund of CGT paid? This still needs further clarification.
Is Business Asset Disposal Relief available if EOT relief is withdrawn?
Business Asset Disposal Relief (BADR) is a tax relief on the disposal of certain business assets and company shareholdings of 5%+ held for at least two years, where the seller is also an employee or director of that company. Where available, it reduces the main rate of capital gains tax from (currently) 24% to 18% on a seller’s first £1m of capital gains.
BADR is not available on a sale to an EOT if the seller claims the EOT-specific CGT relief, the effect of which is that the headline 24% CGT rate applies but on half of the gain (so the effective tax rate becomes 12%).
But what happens if the EOT-specific CGT relief is withdrawn (because there is a “disqualifying event” after the sale)?
HMRC have now provided clarification on whether BADR may be available where this happens.
HMRC responded: “Where EOT relief has been withdrawn,... the [seller] may make a claim to BADR Relief provided of course that the BADR conditions ... were met in relation to the original disposal, and that the claim is made within the applicable time limits.”
HMRC have also issued some much-needed new guidance on the taxation of Employee Benefit Trusts
How are Employee Benefit Trusts taxed?
Employee Benefit Trusts (EBTs)are different from EOTs, generally both in purpose and which employees they benefit. They are often used to acquire a pool of shares in a company that can then be allocated to specified individual employees under an employee share scheme. When employee shareholders leave, the EBT may then buy their shares back and recycle them to other employees (often called “warehousing”).
An EBT will need to be funded to acquire shares, typically by contributions from the company.
Since 30th October 2024, the tax treatment of these contributions has not been entirely clear, many advisers being concerned that contributions to the EBT trustees would be considered as being “in respect of shares” and therefore treated as an income taxable distribution of company profit to them.
HMRC provided some clarification on contributions by a company to the trustees of an EBT:
“The question of whether a payment is a distribution ‘in respect of shares’ in any particular case remains one of fact and degree.
“However, HMRC does not generally regard contributions by a company to the trustees of an EBT as distributions ‘in respect of shares’ where those contributions are intended to allow the EBT to act as a warehouse for shares pending award or as a market-maker to acquire vested shares in the operation of a tax advantaged or non-tax advantaged employee share scheme, and do not form part of a scheme or arrangement for the extraction of value to the shareholders.
This clarification will have practical importance for many companies which have some form of employee ownership. It ensures that EBTs can continue to be used for share warehousing. For companies that are majority owned by an EOT, it may additionally help ensure that founders who have retained a minority stake (and other individual shareholders) continue to have a way to sell their shares internally.
What questions remain about the new EOT and EBT tax guidance?
Whilst we welcome the further detail provided from HMRC, gaps and questions remain. We will continue to monitor developments and provide updates as further guidance is published.
If this raises any questions or concerns of how this affects or could affect you please contact us or your accountant to discuss.
Frequently Asked Questions
What changed to EOT Capital Gains Tax relief in 2025?
From 26 November 2025, qualifying sellers transferring shares to an Employee Ownership Trust may only receive relief on 50% of their capital gain rather than the previous 100% relief.
Do sellers still need to file a Self Assessment tax return after selling to an EOT?
Yes. Sellers must report the disposal through Self Assessment and claim the relevant EOT relief.
What happens if deferred consideration from an EOT sale is never paid?
Where any part of deferred consideration becomes irrecoverable, sellers should generally be able to make a claim under section 48 TCGA 1992 for a refund of overpaid CGT.
Can Business Asset Disposal Relief apply if EOT relief is withdrawn (reducing tax rate from 24% to 18%)?
Potentially yes, provided the relevant BADR conditions were met at the time of disposal and the claim is made within the required time limits. Please note that BADR is only available on an individual’s first £1 million of gains.
Are EBT contributions by companies automatically treated as distributions?
No. HMRC has confirmed that contributions to an EBT are not generally regarded as taxable distributions where they are genuinely used to enable the EBT to acquire shares to be awarded under an employee share scheme and not for extracting shareholder value.
Here to help
As trusted employee ownership problem solvers and experts, and with over 200 employee ownership trust transactions successfully completed, for you (or your clients) we will:
- ensure a clear and safe path through the legal and tax requirements that will always need to be met in any transition to employee ownership, and
- ensure your employee ownership trust is practical, commercial and always structured to meet your unique needs.