2025 EO Budget Update

The November 2025 budget announced the implementation of a 50% CGT tax relief, up from the previous 0% for any transitions completed after the budget. 

The changes sent a ripple through the EO sector where a level of complacency had set in given the governments’ vocal support of employee ownership and its positive impact on businesses, and the breadth of changes that had been implemented after the 2024 budget, despite the current need to raise revenues.

Articles on the recent changes have been published, including this one from the EOT team at Geldards which explains the changes from a tax perspective: Changes to CGT on sales to EOTs

Elsewhere, the Employee Ownership Association has published an article on the changes and the steps being taken to clarify how they’ll be implemented, including their own call for input and a recent meeting with the treasury to discuss practical application. Take a look here: CGT Relief on the EOT One Week On – Your Questions Answered

Uncertainty over the timing of the CGT payments remains the missing piece at the moment and may, until clarity is given, curtail transitions.

Acceptance

Once the dust had settled, most were in agreement that a 50% relief applied to the vendors was proportionate, given the lack of tax relief for other forms of exit.

Companies we are working with who had been planning an exit in the next few months have stepped back, considered and most are still proceeding with their plans as, whilst the 100% CGT relief was a positive, it wasn’t the only incentive for securing a long-term sustainable future for their business.

Anecdotally we do know of some transitions that won’t take place, but maybe these are the companies, and vendors, that may have been transitioning for tax reasons only, and the benefit of being EO would never have translated into their increased economic contribution or long term sustainability of the business.

Complexity of Implementation

As mentioned, there will be further discussion and disclosure about how this will be applied. Speculation largely focusses on its application, when the tax will be payable, whether when payment is made both at outset and beyond trough deferred consideration or a vendor loan, or in full on initial transfer. The difference could make a significant difference, although may also serve to provide clarity between the option of a structured vendor loan or flexible deferred consideration.

An initial article on potential payment structures for the CGT written by Doyle Clayton can be found here: Changes to EOT CGT relief and options for payment of CGT - Doyle Clayton

What this will create is a greater need for clear record keeping of payments by the company and the vendor. It may also require greater consideration of the ability to repay the deferred consideration and a more detailed valuation and repayment schedule by valuers at the outset.

The EO sector has increasingly been seeing the provision of 3rd party providers of funding for the transition, negating the need for deferred consideration and a tail of repayment to the vendors. Some of these providers are niche specialist providers, some are large lenders. Will the changes impact on the availability of such funding for EO transitions? For further reading, our previous article on EO funding at transition and beyond can be found here.

Our insight so far is that the funding remains available to those companies with a good financial track record and an achievable valuation, but will this change just as the availability of funding has started to widen?

Flexibility of Repayment.

Over the years we have worked with EO companies post transition, we have seen many amend their repayment profiles through early, late, delayed payments, payment holidays and amended repayment schedules.

Whilst good valuations are able to incorporate potential up- and down-sides, both external and internal impacts may change over the repayment period, especially where this may be long term repayment period.

There is also the aspect of interest payable on the deferred consideration, which is often discussed post transition, especially where high interest applies. We have seen interest rate increases included in repayment schedules after a period to encourage early repayment, or to source external funding to repay the deferred consideration through 3rd party funding once the business has transitioned and stabilized from the initial reduction in cash holdings.

Part of the clarity needed is on how tax will be applied to deferred consideration interest and, if applicable, compound interest.

Hence, the detail of how the CGT is payable post transition may impact on the ability of EO companies to react flexibly to repayment and may result in more complex financial calculations needed for companies seeking to make changes. 

The outcome - more future work for tax advisers, and greater complexity for the often small, and financially constrained as a result of the repayments, EO companies that it applies to.

Unintended Consequences

CGT was never 0%, it was only deferred until a future further sale of the shares. 

As we’ve stated before, EOT transitions shouldn’t be the starting point for a planned future onward sale, but things change, and a future decision to sell to a 3rd party out of the EOT should not be discounted.

EOT owned companies are also not immune to the interest of potential buyers, whether trade buyers looking to consolidate or looking to extend their market reach, or PE firms seeing the value of an acquisition in a particular sector.

In such an event, those companies who have already paid 50% will have a lower CGT payment on sale than those at 100% relief. 

Those EO companies transitioning after November 2025 will now have a more attractive price tag of acquirers, with 50% of the CGT tax already paid. The residual is paid by the trust, although practically costed into the acquisition price.

The government has pronounced its encouragement of EO companies and research evidences their benefit to the economy in terms of sustainability, growth and economic input. Despite this, a potential unintended consequence may be the potential for acquisition or sale of EO companies, taking them out of this sweet spot of positive economic contribution. 

Good for Employees

On a sale of an EOT company that transitioned prior to November 2025, depending on the timing of the sale post transition, either the vendors or the trust, pays CGT at 100%. This is based on the valuation at sale since the last sale of shares prior to the transition, which in many EO scenarios is when the company was incorporated, so may be a significant sum. 

If the trust is paying the CGT, this amount is deducted from the proceeds distributed to the beneficiaries, reducing the amount available for those employees that have contributed to the success of the company.

Hence, the 50% reduction in CGT relief means that the residual proceeds for distribution will be higher as a proportion of the CGT has already been paid. A potential win for the beneficiaries in the event of a sale, and a potential reason why some employees, and their leadership team, may be more inclined to welcome (or seek) a sale of their EO company.

If you want to read more about EO sales, check out our article on the topic: Selling an Employee Owned Company

Concluding Thoughts

The changes will not decimate the EO sector and the benefit that employee ownership brings as an ownership model in the UK remains. 

These benefits include providing a guaranteed buyer, flexibility for vendors to stay or reduce or go as they wish, less cost and stress in the transaction, preserving company culture, more engagement, more secure jobs, long term sustainability of the business, etc. 

They should remain a very popular form of exit for SMEs for the foreseeable future. It is still the best business succession tax incentive out there, although more vendors may want to use bank debt to get a larger upfront payment. 

However, several potential EO transitions may now not materialise. The impact over time could be more businesses falling into leveraged PE ownership, which can lead to value extraction behaviour from otherwise stable and people-serving businesses, and more economic fragility during downturn/headwind periods. More widely, increased PE ownership could impact competition and lead to higher prices for consumers. 

Hence despite the inevitable emotion surrounding the rate change, the bigger picture is that the government offered CGT relief for the sale of a business to an EOT primarily to promote employee-owned businesses as a key economic component, and it continues to do so. The national agenda clearly still supports all that the intended culture of an employee-owned business brings and, from a company perspective, only 50% of the gain is now "held over" in the event of a share disposal or disqualifying event - so businesses transitioning from now will be in a better position than those before. 

The opportunity for EO companies to thrive and the sector to continue to grow remains. Vendors still benefit from a beneficial CGT relief for selling their company into a robust ownership structure that has the potential to create long-term sustainability for their business whilst providing them with recompense for their input into its success.

As trustees, we welcome the changes, albeit that the details on practical implementation are needed as a priority to ensure that transitions don’t curtail just as the benefit and growth of the sector is increasing.

Further Reading

If you’d like to read the changes direct, they can be found on the government website here: Capital Gains Tax — Employee Ownership Trusts relief reduction - GOV.UK

If you want to contribute to the call for evidence from the Employee Ownership Association you can find details here: Call for Evidence: Share Your Employee Ownership Experiences with Government

The evidenced based research on the benefit of EO companies can be found on the Ownership at Work website at: EO Knowledge Programme - Ownership at Work

This article was produced from the input of IDT’s independent trustees, providing their own perspective in light of their experiences in the EO sector. If you would like to know more about our trustees our article can be found here Who Are Our Trustees?, or contact us at info@directorsandtrustees.co.uk if you are considering the appointment of your first or a successor independent trustee.