Selling Your Business to an EOT? The Four-Year Tax Risk

Selling to an Employee Ownership Trust gives an owner a route out, keeps the business independent and hands employees a stake in what they help build. For most sellers, completion feels like the end of the tax question.

It is not. Suppose that two years after you sell, the board issues shares to bring in outside investment. That single decision, made for sound commercial reasons by people you no longer work with, can withdraw your Capital Gains Tax relief and leave you with a bill running into six figures.

For disposals made on or after 30 October 2024, a set of EOT disqualifying events can revoke the relief at any point in the first four tax years after the year of disposal. That is four times longer than the window that applied before. This is what to check before you sell, and what to check if you already have.

Who this applies to

Owners who have sold to an EOT since 30 October 2024 and believe the tax position is closed. Trustees, who now carry obligations that can cost either the seller or the trust. And anyone still considering a sale, because most of what protects a seller is far easier to build into the deal than to negotiate afterwards.

What it could cost

Two examples, because the answer depends on when you sold.

If you sold before 26 November 2025

A founder sells 60% of her trading company to an EOT in February 2025 for £4m, against a base cost of £100,000. The whole £3.9m gain is held over, so no Capital Gains Tax is payable at the time.

In 2027 the company issues shares to an outside investor. The trust’s holding falls from 60% to 48% and the controlling interest requirement is no longer met. Her claim is revoked and the gain is recalculated as if it had never been made.

• Gain brought back into charge: £3.9m
• Capital Gains Tax at 24%: £936,000, plus interest from the original due date
• HMRC can make the adjustment outside the normal time limits

If you sell under the current rules

For disposals on or after 26 November 2025 only half the gain is held over. On the same £3.9m gain, £1.95m becomes chargeable in the year of disposal, producing an initial Capital Gains Tax liability of £468,000 under these assumptions. That is payable through Self Assessment rather than on completion. The other £1.95m is held over, and is what remains at risk.

The same share issue inside the clawback window brings that half back into charge, adding roughly £468,000 plus interest. The exposure is half the size, but you have already paid the other half, and Business Asset Disposal Relief is not available as a fallback where relief under section 236H has been claimed.

Both figures assume a higher rate taxpayer, the annual exempt amount already used, no allowable losses and the 24% main rate. Where part of the consideration is payable in instalments over a period beginning no earlier than the disposal and exceeding 18 months, section 280 TCGA 1992 can allow the tax to be paid over up to eight years, ending no later than the last consideration instalment. It is at HMRC’s discretion rather than automatic, and it does not reduce the liability, but for a seller still owed deferred consideration it changes the cash flow.

What can go wrong after you have sold

The disqualifying events are ordinary commercial developments rather than anything exotic. Four are worth knowing by name.

The trust loses its controlling interest

The risk easiest to overlook, because it can be triggered without anyone intending it. A share issue, an equity raise, an option exercise or a management incentive can all dilute the trust below the threshold. The decision usually sits with the board rather than the trustees, and nobody in the room is necessarily thinking about the seller’s tax position.

The company stops trading as it did

A change in what the business does, a significant investment arm, or an accumulation of non-trading assets can all put the trading requirement in question. Businesses evolve over four years.

The all-employee benefit requirement is breached

Trustees applying trust property in a way the required trusts do not permit is a disqualifying event in its own right. Distributions and benefits need checking against the equality requirement before they are made, not after.

The trustee board changes

Trustee appointments, independence and UK residence all bear on whether the EOT continues to qualify. A former owner can be a trustee: HMRC’s own example has the former sole shareholder as one of three, alongside an employee representative and an independent trustee. The risk is attrition. If either of the other two leaves without replacement, excluded participators reach 50% of the board and the requirement fails. Residence rules are involved enough to deserve their own treatment, but the practical rule is simple: review the position before any trustee resigns, joins or moves abroad, not after.

A further requirement limits how far the company’s shares are concentrated among participators relative to its employees, measured by the participator fraction, which must not exceed two-fifths. A temporary breach can be disregarded where it lasts no more than six months and arises from events outside the trustees’ reasonable control.

There is one other statutory let-off. Where a trustee independence breach arises only from the death of a trustee, or of a director of a corporate trustee, it is ignored if the requirement is met again within six months of the death. Neither exception covers an ordinary resignation, which is why attrition on the trustee board is worth watching.

Who pays, and when

After the window closes the exposure does not disappear. It changes hands. The gain arises in the trust, and how that cost reaches the wider group depends on how the trust is funded and what the trustees do next.

Which rules apply to your sale

Three changes in thirteen months, so the date matters more than anything else.

• Disposals on or after 30 October 2024. Three new relief requirements, and the clawback window extended from one tax year to four. Enacted in Schedule 6 to the Finance Act 2025.
• Claims made on or after 6 April 2025. A claim must state employee numbers at disposal and the total consideration.
• Disposals on or after 26 November 2025. Only half the gain is held over, and Business Asset Disposal Relief and Investors’ Relief are unavailable where section 236H relief has been taken. Enacted in section 35 of the Finance Act 2026.

Budget 2026 left the relief itself alone. The eight relief requirements and the four-year window are unchanged, and from 6 April 2027 a company moving to an EOT structure will keep access to EMI. The date of disposal decides which substantive rules apply; the date of the claim decides certain reporting obligations.

How to protect yourself

Not every breach is cheap to prevent. A business that genuinely needs outside equity faces a real commercial choice rather than an administrative one. What follows reduces the risk of being caught unawares, which is a different and more achievable thing.

• Make the controlling interest test part of board process. Any share issue, option grant or incentive award during the window should be checked against the trust’s holding before approval.
• Keep the trustee board populated and its residence under review. A well-governed UK-resident corporate trustee works, and so does a mixed board. What matters is that somebody owns the question and takes advice before a change rather than after.
• Require notification before the fact. The trustees and the company should be obliged to tell the seller before any change touching the eight requirements. Without that, the seller finds out when HMRC does.
• Diarise an annual review until the window closes. Checking the position once a year is short work. Discovering a breach two years late is not.

Your solicitor should also consider a restriction on dilutive events during the window, a commitment to maintain trustee composition, notification obligations triggered before any change, a seller right to information, and an indemnity for a clawback caused by the company or the trustees, with a clear-eyed view of whether it is worth anything in practice.

After an event there is usually little to be done. The claim is revoked, and reversing the circumstances does not reinstate it. The only statutory softening is the six-month participator fraction tolerance and the death exception described above.

Already sold to an EOT? What to check

1. Establish which rules applied, by reference to the date of disposal.
2. Work out when your window closes. Four tax years from the end of the year of disposal, which is a specific date you can diarise.
3. Check the share capital. Has anything been issued since completion, and does the trust still hold a controlling interest?
4. Check the trustee composition, including whether anyone has resigned without replacement and whether any trustee is an excluded participator.
5. Read the trust deed against the eight requirements, particularly on appointment, removal and residence.

Lexmore’s View

EOTs still work. For an owner who wants continuity, a motivated workforce and a clean exit, the structure does something a trade sale cannot, and the changes of the last two years have not altered that.

What has changed is the length of the tail. A seller now carries capital gains exposure for four tax years on events largely decided by other people, and the triggers are not exotic. An ordinary funding round that dilutes the trust is among the easiest to overlook. That is a manageable risk, but only for someone who knows it exists. Know which rules apply. Know when the window shuts. Know who is watching.

How Lexmore can help

Sold your business to an EOT, or considering it? The time to identify these risks is before they become a problem.

For owners who have already sold, an EOT transaction review covers the historic disposal and which rules applied, whether the qualifying conditions are still met, the trustee composition and its residence, any changes to the share capital since completion, and a monitoring schedule running to the end of the clawback window. For owners still planning a sale, the same protections cost far less to build into the documents than to negotiate later. Where legal drafting or trust law advice is needed we work alongside your solicitors rather than in place of them.

Our blogs on how EOTs work, how the trust pays the founder out and how an EOT compares with a sale or management buyout cover the position before completion.

References

• Finance Act 2025, Schedule 6
• Finance Act 2026, section 35
• TCGA 1992, section 80
• TCGA 1992, section 280: payment by instalments
• CG67820: The relief requirements
• CG67823: The controlling interest requirement
• CG67827: The trustee independence requirement
• CG67856: Calculating the participator fraction
• CG67860: Disqualifying events, clawback period
• CG67861: Disqualifying events after that period
• HS277: Employee Ownership Trusts and Capital Gains Tax (2026)