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Employee Ownership Trust & IHT UK (2026): Business Relief After the Budget Changes

Employee Ownership Trusts (EOTs) have become an increasingly popular route for business succession in the UK — offering CGT-free exits and strong employee engagement. But the inheritance tax picture is more nuanced. This guide explains how EOTs interact with Business Property Relief, how the April 2026 BPR cap changes the maths, and what business owners should include in their wills.

EOTs and the CGT Exemption: What It Does (and Doesn't) Cover

When a business owner sells a controlling interest in their company into an EOT, the gain on that disposal is exempt from Capital Gains Tax — potentially saving tens or hundreds of thousands of pounds compared with a trade sale. But the CGT exemption provides no IHT relief on the proceeds received.

Once the sale completes and cash lands in the owner's estate, those proceeds form part of their chargeable estate at death. BPR — which might have sheltered the company shares — no longer applies to cash or loan notes. Owners who complete an EOT sale and sit on the proceeds without further planning have inadvertently converted a BPR-sheltered asset into a fully exposed IHT liability.

BPR on Shares Before the EOT Sale

For a business owner who dies before completing an EOT sale, their qualifying unquoted trading company shares can attract Business Property Relief at 100% — reducing IHT on those shares to zero (up to the April 2026 £1m cap, above which a 50% rate applies). The 2-year minimum holding period must be satisfied.

This means a business owner with shares worth £2m who dies mid-transaction may pay less IHT than one who completed the sale and holds £2m cash. The pre-sale BPR position is therefore worth quantifying as part of any EOT transaction timetable.

See: BPR and the April 2026 changes

The April 2026 £1m BPR Cap

From April 2026, BPR and APR share a combined £1m per-person cap at the 100% relief rate. Qualifying assets above £1m receive 50% relief — an effective IHT rate of 20% on the excess.

For a business owner with shares worth £5m at death, the IHT bill is now potentially £800,000 (20% × £4m excess). This significantly increases the urgency of EOT exit planning for larger businesses: completing the sale, receiving proceeds, and then actively reducing the estate through gifting, pension contributions, or spending may produce a lower overall tax cost than retaining shares and relying on BPR above the cap.

Spouses and civil partners can combine their £1m caps — jointly £2m of qualifying business assets at 100% relief before the cap bites.

What to Put in Your Will as an EOT Business Owner

  • If you hold qualifying shares at death, direct executors to claim BPR on IHT400 — and structure specific gifts to maximise relief against the £1m cap before gifting non-business assets
  • If you hold vendor loan notes or deferred consideration, these are fully IHT-exposed — consider gifting progressively using annual exemptions and the 7-year PET rule
  • A nil-rate band discretionary trust in the will can preserve the transferable nil-rate band and allow flexible distribution between beneficiaries
  • Review the will whenever the company's value changes materially — a pre-sale BPR position and a post-sale cash position require very different will structures
  • Life insurance written in trust remains the most reliable hedge against an IHT bill above the BPR cap

Frequently Asked Questions

What is an Employee Ownership Trust (EOT)?

An Employee Ownership Trust (EOT) is a special form of trust introduced by the Finance Act 2014 under which a controlling interest (more than 50%) in a trading company is held on behalf of all the employees. The government incentivised EOTs by giving selling shareholders an exemption from Capital Gains Tax on the disposal of their shares into the trust (provided qualifying conditions are met), and allowing the company to pay employees tax-free bonuses of up to £3,600 per year. Famous examples include Richer Sounds, Riverford Organic, and Aardman Animations.

Can Business Property Relief (BPR) apply to shares held in an EOT?

BPR can apply to qualifying unquoted trading company shares before they are transferred into an EOT — so a business owner who holds shares for at least 2 years and dies before completing an EOT sale can potentially claim 100% BPR (subject to the April 2026 £1m cap). Once shares are transferred into an EOT, the EOT itself holds the shares, and BPR on the underlying company continues to be available on the trust's beneficial interest in the shares — but the trust structure adds complexity. The individual who sold into the EOT holds deferred consideration (vendor loan notes or earn-outs), not shares, so BPR on that consideration requires separate analysis.

How does the April 2026 BPR cap affect EOT planning?

From April 2026, Business Property Relief and Agricultural Property Relief share a combined £1m per-person allowance at the 100% rate. Business assets above £1m receive only 50% relief — an effective IHT rate of 20% on the excess. For a business owner with shares worth £5m, the IHT on death (if not sold) is now up to £800,000 rather than zero. This makes completing an EOT sale before death more attractive for larger businesses: once shares are sold into the EOT and consideration received, the owner's estate holds cash or loan notes (fully taxable at 40%) rather than BPR-qualifying shares — but the EOT sale itself is CGT-free. The net tax picture depends heavily on timing, valuation, and individual circumstances.

Is there IHT on the sale proceeds received from an EOT sale?

Yes. When a business owner sells their shares into an EOT and receives cash (or deferred consideration such as vendor loan notes), that cash or debt forms part of their estate for IHT purposes. The CGT exemption on the EOT sale does not provide any IHT relief. If the owner retains the proceeds until death, IHT at 40% applies (subject to nil-rate bands and the residence nil-rate band). Effective estate planning requires reinvesting or gifting proceeds, using tax-efficient wrappers (ISAs, pensions), or making potentially exempt transfers in the 7 years before death.

What should a business owner include in their will regarding an EOT?

Key will-planning points for EOT business owners: (1) If the EOT sale has not completed and the owner holds qualifying shares, the will should direct executors to claim BPR on IHT400 — and the order of gifts should maximise use of BPR against the £1m cap before other reliefs. (2) Deferred consideration (vendor loan notes) in the estate should be specifically dealt with — they are fully subject to IHT unless gifted or structured otherwise. (3) Consider a nil-rate band discretionary trust to preserve the transferable nil-rate band if the estate includes both business and non-business assets. (4) Life insurance written in trust to fund IHT above the BPR cap is worth considering. (5) Review the will each time the value of the business changes materially.

What are the qualifying conditions for the CGT exemption on an EOT sale?

To qualify for CGT exemption on an EOT sale: (1) the EOT must acquire a controlling interest (more than 50%) in the company; (2) all eligible employees must be entitled to participate in the EOT on the same terms (no preferential treatment for directors or higher earners — though pay-linked allocation is permitted within limits); (3) the company must be a trading company or the holding company of a trading group; (4) the number of persons who are directors or employees who own or have owned 5% or more of the company must not exceed 2/5 of the total employees. If any condition is breached within a clawback period, the CGT exemption can be withdrawn.

Can an EOT itself claim BPR on the trading company shares it holds?

An EOT is a discretionary trust — and HMRC's view is that the relevant property regime applies to EOT-held shares for IHT purposes in the same way as any other discretionary trust. The shares in the trading company held by the EOT can potentially qualify for BPR, which reduces the 10-year anniversary charge and exit charges. However, the April 2026 cap applies: only the first £1m of qualifying business property receives 100% relief. For large EOTs holding significant company shares, this creates a periodic IHT exposure that trustees must model and plan for.

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This article is for general information only and does not constitute legal or tax advice. EOT and BPR planning is complex — always consult a specialist corporate and private client solicitor or tax adviser.