Employee Ownership Trusts for Property Businesses: Still Worth It After the CGT Relief Cut?

Employee Ownership Trusts have spent the last decade as one of the cleanest exit routes for a business owner with no buyer lined up and no interest in a trade sale. The Autumn Budget 2025 cut the headline Capital Gains Tax relief in half, and for most property investment companies the relief was never available in the first place. Both facts matter before assuming an EOT is the answer to a family property business's succession problem.

What an EOT actually is

An Employee Ownership Trust is a trust structure that acquires a controlling interest — more than 50% of the voting rights, share capital, profits and winding-up proceeds — in a trading company on behalf of its employees. The employees benefit indirectly through the trust rather than holding shares themselves, and the trustees must retain at least a 51% controlling interest on an ongoing basis once the sale has completed. The purchase is typically funded out of the company's own future profits over a period of years, rather than from a third party's cash, which is what makes it attractive where there is no obvious external buyer for a family business.

The CGT relief has been halved

Since the regime was introduced in 2014, a qualifying sale of a controlling interest to an EOT attracted 100% Capital Gains Tax relief — the entire gain fell outside tax at the point of sale, with the liability effectively deferred rather than eliminated, since the trustees inherit the base cost. The Autumn Budget 2025 changed that materially: for disposals from 26 November 2025, only 50% of the gain now qualifies for relief. The remaining half is chargeable to CGT at the point of sale, and Business Asset Disposal Relief and Investors' Relief cannot be claimed against that taxable portion. In practice, this produces an effective rate of around 12% for a higher-rate taxpayer on the whole gain, roughly half the standard 24% rate that applies to an ordinary share sale — a meaningful discount, but a much less compelling one than the previous 0%.

The trading company test is the bigger obstacle for most property businesses

Even before the rate cut, EOT relief was only ever available where the company being sold is a trading company, meaning its income is derived wholly or mainly from genuine trading activity rather than from holding investments. This is the same distinction that runs through several other reliefs in this area — see our article on the badges of trade for how HMRC draws the line generally.

The practical consequence for property businesses is significant. A company that holds a portfolio of properties to let for rental income is ordinarily treated as an investment company for this purpose, and falls outside EOT relief entirely, regardless of the CGT rate. A genuine property development or construction trading business — buying, developing and selling on, rather than holding to let — has a much stronger case for meeting the trading test, though it still needs testing against the specific facts, and a business that mixes trading and investment activity needs the split examined carefully before assuming it qualifies.

The other conditions tightened from 30 October 2024

Alongside the rate cut, the Government introduced a separate set of tightening measures for EOT sales from 30 October 2024, aimed at closing down arrangements where the previous owners retained effective control after the sale:

• Trustee residency — EOT trustees must now be UK resident. Previously, non-UK trustees could be used in a way that limited HMRC's ability to collect CGT if a disqualifying event later occurred; that route is now closed for EOTs established from this date.
• Trustee independence — fewer than half of the trustee directors can be former owners of the company, or people connected with them, preventing sellers from continuing to control the trust that now owns their former company.
• Extended clawback period — if the EOT's qualifying conditions are breached, the period during which the CGT relief can be clawed back from the original sellers now runs to the end of the fourth tax year following the tax year of disposal, up from just the following tax year previously.
• Independent valuation — trustees are expected to ensure the price paid for the company does not exceed an independently supportable market value, reducing scope for the sale price itself to be used as a tax-planning lever.

None of these conditions are new obstacles to qualifying in principle, but they do mean an EOT sale now needs more careful structuring and more independent oversight than it did a couple of years ago, particularly around who sits on the trustee board.

Where an EOT can still make sense for a property business

The combination of a halved CGT relief and a trading company requirement rules an EOT out for most buy-to-let holding companies, but it does not rule the structure out across the board. It remains worth serious consideration for:

• Genuine property development or construction trading companies with a real trading track record, where the owner wants to step back without selling to a competitor or a private equity buyer.
• A group structure where trading activity, such as development management or construction services, sits in a separate company from the investment portfolio, allowing the trading entity to be assessed for EOT purposes on its own facts.
• Businesses with a strong existing management team who are capable of running the company after the founder steps back, since an EOT sale does not bring in new external management the way a trade sale often does.

Where none of those apply, other succession routes are worth comparing properly — extracting value through a Members' Voluntary Liquidation where a company's useful life has ended, or restructuring via a demerger where trading and investment activities need separating before any exit route becomes available at all.

Common questions

What is an Employee Ownership Trust and how does it work?

An EOT is a trust set up to acquire a controlling interest, more than 50%, in a trading company on behalf of its employees, who benefit indirectly rather than holding shares personally. It gives an owner a way to exit without finding an external buyer, typically funded from the company's future profits.

Has the CGT relief for selling to an EOT changed?

Yes. A qualifying sale used to attract 100% Capital Gains Tax relief. The Autumn Budget 2025 halved that to 50% for disposals from 26 November 2025, with Business Asset Disposal Relief and Investors' Relief unavailable against the taxable half.

Can a buy-to-let property investment company qualify for EOT relief?

Generally no. EOT relief requires a trading company, and a company that simply holds properties to let for rental income is normally treated as an investment company and falls outside the relief entirely. A genuine property development or construction trading business has a stronger case.

What happens if the EOT conditions are breached after the sale?

If a disqualifying event occurs within the clawback period, extended to the end of the fourth tax year following the tax year of disposal, the CGT relief can be withdrawn and the sellers assessed as if the claim had never been made. Trustees must also be UK resident, with fewer than half the trustee directors being former owners or connected persons.

This article is general information, not personal tax advice, and tax rules change. Your own position depends on facts we cannot see from here — please take advice before acting on anything above.

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