Handing on the business

Last year’s UK Budget changes – which government data suggests will raise £900m on average annually from 2027/28 onwards – put a question mark over future EOT planning. Some good news for former business owners who had completed EOTs before 26 November but had deferred some of the consideration was that they will not be affected by the new tax treatment. But departing owners with EOTs not yet across the line found themselves searching for fresh guidance on the next steps.

Still attractive

The first question for most will be how the new CGT rate compares with reliefs for trade or private equity sales. That answer appears largely positive. ‘In theory, sellers can choose to claim business asset disposal relief [BADR] instead of EOT relief,’ explains Andy Ryder, corporate finance partner at Shorts. However, he points out that the two cannot be combined in the same disposal, and ‘at current rates, EOT relief results in a lower CGT rate and also preserves the BADR allowance for future disposals’.

The new reality is summed up by Samantha Lenox, partner and head of employee share schemes at law firm Harper James. She says: ‘The tax gap between an EOT sale and a straightforward trade sale has narrowed, but an EOT is still highly attractive, particularly where owners care most about employee engagement, employee productivity, preserving jobs, independence and legacy.’

Some astute restructuring of a planned deal may also alleviate the burden of the new tax liability. Andrew Harrison is on the board of Employee Ownership Ireland, a member-led community which supports companies in moving to employee ownership. He says that one option advisers should look at is ‘agreeing payment instalment plans with HMRC where the purchase price is paid over an extended period. Subject to agreement with HMRC, payments can be spread over up to eight years, with 50% of each repayment going towards the CGT liability.’

Other impacts

Mohammed Mujtaba, corporate tax partner with Kreston Reeves, predicts consequences beyond a pause to reflect among departing owners, including the valuation of the shares being sold. ‘We have historically seen sellers take a more friendly approach and not be as aggressive with their valuations. This may change with the additional tax burden imposed,’ he says.

One potential market upside is more fluidity in ‘secondary and onward EOT sales/exits’, given the CGT burden is now shared. ‘EOTs may be more willing to sell to interested third parties where the price is right and the tax burden not so high,’ Mujtaba says, but adds: ‘The change is likely to dampen the excitement and allure of an EOT as a viable exit structure.’

A broader look at Budget 2025 suggests the picture is not entirely gloomy for those favouring a greater employee stake in their business. Side by side with the changes to EOTs came plans for significant expansion to enterprise management incentives (EMIs), which come into effect on 6 April 2026. Carefully targeted towards smaller, growth-oriented companies, and with strict qualifying criteria, EMIs provides a range of attractive tax advantages on employee share options. Disappointingly, however, the changes will not apply to businesses in Northern Ireland, and the current limits will still apply.

Lessons from change

A key architect and proponent of EOTs, lawyer and academic Graeme Nuttall has expressed his disappointment at the CGT rule change. He adds, though, that it can be viewed as a ‘fiscal recalibration rather than a rejection of the model itself’.

Employee Ownership Ireland, which was set up in January 2025 with the aim of making EOTs ‘the succession model of choice’ for business owners in Northern Ireland is also focusing determinedly on the continued upsides of the model. It will run a series of webinars and seminars in 2026 to ‘provide clarity around these new tax implications so that succession decisions are based on solid, factual information’, Harrison explains. ‘Our hope is that, after the initial shock, owners will quickly come back to the many reasons why the EOT model was right for them originally.’

Those in the Republic of Ireland who have looked enviously at the opportunities generated by EOTs in the UK over the past decade are also taking stock of the new reality. ‘Ireland has the benefit of learning from the UK’s experience in full,’ says Marie Flynn, PwC tax director and chair of the Irish Proshare Association, which promotes employee share ownership. ‘A well-designed EOT regime can support succession, protect jobs and strengthen employee engagement, but it must also be credible and resilient when the fiscal environment tightens.’