Introduced back in 2014, the concept of selling your business to an EOT allowed, in simple terms at least, for the proceeds of the sale to be free from capital gains tax. Obviously, there were a raft of conditions which needed to be met to fall within these provisions and these were tightened up slightly at the Budget 2024. Fundamentally, the capital gain was effectively only ever deferred, with this falling back on the shareholders (if the EOT disposed of the shares within the first four years) or the EOT itself (if a disposal occurred after that time).

On the introduction of EOTs, they were sold as bringing the ‘John Lewis’ model to more businesses (the ownership of the company being held for the benefit of the employees), but it is fair to say that in many cases, the tax benefit attached to EOTs has become the main driver, and the old adage of ‘letting the tax tail wag the dog’ has now led to a watering down of the provisions, with immediate effect.

Although subject to legislation being enacted, the draft legislation suggests that only half of the capital gain on the sale to an EOT will be exempt from capital gains tax – the half brought into tax will be taxed at the main rate of capital gains tax (currently 24%), with no ability to claim business asset disposal relief or investors relief. So in effect, qualifying disposals to EOTs will be taxed at 12%.

As with the original provisions, the element of the capital gain which is not brought into charge will be deferred, and brought back into charge if the EOT disposes of the shares in the future. All other conditions remain the same, as does our advice… only consider an EOT if the circumstances fit.

If you would like to discuss this in further detail, please get in touch with your usual contact or e-mail us at experts@tacs.co.uk.