Employee Ownership Trusts and IHT UK 2026: s28A IHTA Exemption, CGT Relief, Qualifying Conditions, and EOTs as a Business Succession Tool
Selling your company to an Employee Ownership Trust is both CGT-free (s236H TCGA) and IHT-free (s28A IHTA). No 7-year PET clock. No BPR cap exposure. Finance Act 2023 tightened the qualifying conditions — former owners can no longer form a trustee majority or pay above market value.
Selling to an EOT: Zero CGT + Zero IHT = Most Tax-Efficient Business Exit Available
A qualifying disposal of shares to an EOT is CGT-exempt (s236H TCGA 1992) AND IHT-exempt (s28A IHTA 1984 — introduced Finance Act 2023). The shares leave the owner's estate immediately with no 7-year survival period. The £1m FA 2026 BPR cap does not apply. Finance Act 2023 (from 1 October 2023): trustees must pay market value only; former owners cannot form a majority of EOT trustees. All employees must benefit equally. Employee bonuses from EOT-owned companies: up to £3,600/yr income-tax-free per employee.
| Aspect | Rule / Principle | Example / Scenario | Planning Guidance |
|---|---|---|---|
| What is an EOT and how does it work? | DEFINITION (s236H TCGA 1992; s28A IHTA 1984): An Employee Ownership Trust (EOT) is a discretionary trust that holds a CONTROLLING INTEREST in a company for the benefit of all eligible employees. 'Controlling interest' means more than 50% of the ordinary share capital, voting rights, and economic interests. The EOT is the permanent shareholder: unlike Management Buy-Outs or trade sales, the company is not sold to a third party. The employees do not personally own the shares (the trust holds them collectively). HOW THE STRUCTURE WORKS: (1) the existing owner sells their shares to the EOT (usually at market value, paid over time out of the company's future profits); (2) the EOT becomes the majority shareholder; (3) the company continues to operate with its existing management; (4) all employees receive equal profit-sharing bonuses (up to £3,600 per year income-tax-free per employee — s312A ITEPA 2003); (5) the former owner receives the sale consideration over several years (loan note or deferred consideration paid by the EOT from company dividends/retained profits). CONTROLLING INTEREST REQUIREMENT: the EOT must own more than 50% of the shares. If the former owner retains 49%: that is NOT an EOT controlling interest — the EOT must own MORE than 50%. The former owner CAN retain a minority stake (up to 49%) — this does not disqualify the EOT. TRUSTEE STRUCTURE: the EOT is governed by a trust deed with professional trustees (or employee-elected trustees). Post-FA 2023: former owners cannot constitute a majority of the EOT trustee board (the 'director-trustee restriction'). | EOT WORKED EXAMPLE: a business owner started a company in 2005 (base cost: nil). The company is now worth £10m. Traditional exit options: (a) trade sale to a competitor — CGT of £10m × 20% = £2m (BADR rate if available: £10m × 10% = £1m); (b) MBO — partial CGT on the shares sold; (c) EOT — CGT = ZERO. The owner sells 51% of the shares to the EOT for £5.1m (no CGT). They retain 49% (worth £4.9m). Over 5 years, the EOT pays the £5.1m from the company's profits (typically via a directors' loan from the company to the EOT). IHT POSITION: the transfer of the 51% stake to the EOT is also EXEMPT FROM IHT under s28A IHTA 1984 (no 7yr clawback; no PET clock needed). The retained 49% stake: still in the owner's estate, but may qualify for BPR (100% if the company meets the trading test under s105 IHTA). The EOT structure can achieve IHT exemption on the controlling stake AND BPR on the minority retained stake. | COMMERCIAL ADVANTAGES OF AN EOT: (1) FULL CGT EXEMPTION: the seller pays no CGT on the disposal to the EOT (s236H TCGA 1992). This is the primary commercial driver. At 20% CGT (or 10% BADR), the saving on a £5m sale is £500k-£1m. (2) IHT EXEMPTION: the transfer is IHT-exempt under s28A IHTA 1984 — the shares leave the estate without IHT or a 7yr PET clock. (3) EMPLOYEE ENGAGEMENT AND RETENTION: EOTs create a collective ownership culture; income-tax-free bonus payments up to £3,600/yr per employee. (4) BUSINESS CONTINUITY: the company is not broken up or sold to a competitor; management and culture are preserved. (5) DEFERRED CONSIDERATION: the seller receives the purchase price over years from company profits — no need for external debt financing or private equity. DISADVANTAGES: the EOT must be permanent (no re-sale of the controlling interest without HMRC approval); the seller receives consideration over time (not a lump sum on completion); the company must remain profitable enough to fund the deferred consideration; governance requires robust trustee arrangements. |
| Qualifying conditions for IHT relief — s28A IHTA 1984 | IHT EXEMPTION CONDITIONS (s28A IHTA 1984 as introduced by Finance Act 2023 and amended by Finance Act 2024): for a transfer of shares to an EOT to be exempt from IHT under s28A, ALL of the following must be satisfied at the time of the transfer: (1) CONTROLLING INTEREST: the EOT must acquire (or hold, taking the transfer into account) more than 50% of the shares, voting rights, and economic entitlement. (2) ALL-EMPLOYEE BENEFIT REQUIREMENT: the trust deed must provide that the property of the trust is held for the benefit of ALL ELIGIBLE EMPLOYEES of the company (and its subsidiaries). 'Eligible employees' = those who have been employed for at least 12 months. The benefit must be on the 'same terms' (equal per-year entitlement; not varying by grade or seniority). Directors may be eligible employees if they work in the business. (3) NO CONTROLLING INTEREST SALE RESTRICTION: the EOT must not be able to dispose of the controlling interest without HMRC approval (preventing the controlling stake being sold from under the employees). (4) FORMER OWNER TRUSTEE RESTRICTION (introduced FA 2023, effective 1 October 2023): former owners (or persons connected with them) must not constitute a majority of the EOT trustees. This prevents former owners from retaining practical control of the company through the EOT trustee board. (5) MARKET VALUE RESTRICTION (FA 2023): the EOT trustees must not pay more than MARKET VALUE for the shares. The consideration must be independently verified. Paying above market value disqualifies the CGT relief and (from FA 2023) the IHT relief. | COMMON DISQUALIFICATION TRAPS: (1) CONNECTED PERSON MAJORITY ON TRUSTEE BOARD: the former owner is one of three trustees; their spouse is another; an unconnected professional is the third. The former owner + spouse = two of three trustees = a majority of connected persons. DISQUALIFIED post-FA 2023. Solution: ensure a majority of EOT trustees are not connected with the former owner (unconnected employee representatives or professional trustees). (2) PAYING ABOVE MARKET VALUE: the company is independently valued at £5m; the EOT trustees pay £5.5m (perhaps under pressure from the seller). The excess above market value disqualifies the CGT and IHT relief. HMRC will scrutinise the valuation. Solution: get an independent RICS/qualified valuation; ensure the consideration is at or below that valuation. (3) EXCLUDING CERTAIN EMPLOYEES: the trust deed only benefits senior managers (not all employees). DISQUALIFIED. Solution: the trust must benefit ALL eligible employees (12-month service) on equal terms. (4) PROVIDING UNEQUAL BONUSES: the EOT pays directors 10× the bonus that it pays to ordinary employees. The 'equality requirement' is breached. DISQUALIFIED. Note: the equality requirement applies to the EOT profit-sharing bonus — the company can still pay performance bonuses from its payroll (outside the EOT profit-sharing). | INTERACTION WITH BPR: EOT relief and BPR are separate. The transfer of shares to the EOT is relieved by s28A IHTA — not by BPR. The former owner's RETAINED minority stake (e.g., 49%) may still qualify for 100% BPR in their estate under s104 IHTA if the company is a qualifying trading company. This means: the controlling interest transferred to the EOT: IHT exempt under s28A. The minority stake retained: 100% BPR (if trading test met under s105). The former owner's estate may have ZERO IHT exposure to the company shares. IMPORTANT — FA 2026 BPR CAP: Finance Act 2026 caps the combined 100% BPR (and APR) at £1m. If the retained minority stake is worth more than £1m (less any other BPR/APR): the excess attracts 50% BPR. EOT relief under s28A is not subject to the £1m BPR cap — it is a separate exempt transfer. EOT planning therefore remains highly attractive even after FA 2026. |
| CGT relief for EOT disposals — s236H TCGA 1992 | CGT RELIEF (s236H-s236U TCGA 1992 introduced Finance Act 2014; amended Finance Act 2023): where an individual disposes of shares in a trading company to an EOT and the qualifying conditions are met, the ENTIRE CAPITAL GAIN on the disposal is exempt from CGT. No CGT, no BADR needed, no annual exemption needed. HOW THE RELIEF WORKS: if the disposal qualifies: (a) the gain that would have arisen (disposal proceeds minus original base cost) is treated as exempt; (b) the seller can have held the shares since day 1 (no minimum holding period required — unlike BADR which requires 2yr trading/employment); (c) there is no restriction on the size of the gain — even a gain of £50m on a disposal to the EOT is fully CGT-exempt. QUALIFYING CONDITIONS FOR CGT RELIEF (overlapping with s28A IHT): same conditions as the IHT relief: controlling interest; all-employee benefit; equal terms; no former-owner trustee majority; market value consideration. CUMULATIVE EFFECT — CGT AND IHT: the disposal is BOTH CGT-free (s236H TCGA) AND IHT-free (s28A IHTA). The seller pays NO CGT on exit, and the shares leave their estate without IHT. FA 2023 TIGHTENING OF CGT RELIEF: Finance Act 2023 introduced retrospective clawback of CGT relief where the qualifying conditions are breached within a certain period after the disposal (specifically: if the EOT disposes of its controlling interest within a period after the original acquisition, the former owner's CGT relief may be clawed back). HMRC APPROVAL: there is no formal advance approval process — the relief is claimed on the self-assessment return. HMRC may enquire into the valuation and qualifying conditions. | CGT RELIEF — PRACTICAL SCENARIOS: (1) BUSINESS OWNER SINCE 2000: shares acquired in 2000 for £1 (nominal). Company now worth £8m. Disposal to EOT: GAIN = £8m − £1 = £7,999,999. CGT at 20% would have been £1.6m. EOT relief: CGT = £0. Saving = £1.6m. (2) MULTIPLE SHAREHOLDERS: two co-founders each own 50% (basis cost £500 each; total company value £6m — each stake worth £3m). Disposal to EOT: both founders sell their stakes. Each gains £3m − £500 = £2,999,500. CGT on each = zero. Combined saving = ~£1.2m CGT. (3) PARTIAL DISPOSAL: the founder sells only 51% to the EOT (retaining 49%). The 51% disposal gains CGT exemption. The retained 49% remains in the founder's estate (may qualify for BPR). The founder can sell the retained stake later (to the EOT or otherwise) — but the later disposal may not qualify for the same CGT relief if qualifying conditions are not met at that time. (4) MANAGEMENT BUYOUT ALTERNATIVE: the founder was considering an MBO (selling 60% to management at £4.8m). CGT = £4.8m × 20% = £960k. Alternative: sell 60% to the EOT instead (CGT = zero), then let the management participate through the EOT (they receive salary + EOT bonuses). Saving: £960k. | INCOME TAX-FREE EMPLOYEE BONUSES — s312A ITEPA 2003: where an EOT owns a controlling interest, the company can pay all eligible employees an income-tax-free cash bonus (EOT bonus) of up to £3,600 per year per employee (since 2016-17; previously £3,200). The bonus must: (a) be paid to all eligible employees on the same terms (equality requirement); (b) not be paid to non-qualifying employees; (c) be properly documented. The income tax saving for a basic-rate employee: 20% of £3,600 = £720/yr. For 50 employees: £36,000/yr total income tax savings. National Insurance is NOT exempt — EOT bonuses are subject to NIC (both employer and employee). NOTE: the income-tax-free bonus is a benefit of the EOT structure (for employees), distinct from the CGT/IHT relief for the seller. TAX PLANNING TIMELINE: the EOT sale typically takes 12-24 months to structure, execute, and settle the consideration. The seller (former owner) often stays involved as an employee/director post-sale (receiving employment income). The EOT deferred consideration is typically funded from company profits over 5-7 years. Specialist EOT legal and tax advice is essential — the qualifying conditions are exacting and HMRC scrutiny has increased since FA 2023. |
| Estate planning implications of EOTs for owner-managed businesses | WHY EOTS MATTER FOR IHT AND ESTATE PLANNING: for owners of trading companies, the traditional IHT mitigation was 100% BPR. FA 2026 capped BPR at £1m (combined with APR). For companies worth more than £1m, the excess over the cap now attracts IHT at 50% BPR rate (effectively 20% IHT on the excess). An EOT transfer: (a) is not subject to the BPR cap — it is an IHT EXEMPT transfer under s28A, not a BPR relief; (b) immediately removes the controlling interest from the estate (no 7yr PET clock needed; no survival period); (c) is CGT-free for the seller. EOT VS LIFETIME GIFT: a lifetime gift of shares (PET) starts the 7yr clock but triggers CGT at the gift date (at market value). The EOT avoids both problems: no CGT on disposal; immediate IHT exemption (no 7yr wait). EOT VS WILL/TRUST PLANNING: a will that leaves company shares to a trust or family members benefits from BPR (subject to the £1m cap from FA 2026). For companies worth significantly more than £1m: the EOT transfer during the owner's lifetime is more tax-efficient than relying on BPR at death. SUCCESSION PLANNING: the EOT is suitable for owners who want to: (a) exit with zero CGT; (b) remove the company from their estate without a 7yr PET clock; (c) preserve the company's independence and employee culture; (d) receive consideration over time (deferred consideration) from company profits. | COMPARATIVE ESTATE PLANNING SCENARIOS FOR A £10M TRADING COMPANY: (1) OWNER DIES HOLDING ALL SHARES: BPR applies — first £1m at 100% BPR (no IHT); remaining £9m at 50% BPR = £4.5m chargeable. IHT at 40% = £1.8m IHT due (post-FA 2026). CGT: rebasing on death means no CGT on the shares for the estate. (2) OWNER GIFTS SHARES TO CHILDREN (PET): CGT at gift date (no hold-over for non-business assets to individuals — hold-over available if gifted into a trust). If gifted to individuals: CGT at 20% on the gain = £10m × 20% (assuming nil base cost) = £2m CGT. The gift is a PET — if the owner survives 7yr: no IHT. If not: IHT with BPR (subject to the £1m cap). (3) OWNER SELLS TO EOT: CGT = £0 (s236H TCGA). IHT on the transferred shares = £0 (s28A IHTA). The owner receives £10m deferred consideration over several years from company profits. The deferred consideration builds up in the owner's personal estate (cash/investments) — which may later be gifted as PETs or subject to NRB/RNRB planning. EOT is clearly most tax-efficient for the share transfer itself. | KEY EOT PITFALLS AND HMRC SCRUTINY: (1) VALUATION DISPUTES: HMRC scrutinises EOT valuations. The trustees must not pay MORE than market value. HMRC has a dedicated unit reviewing EOT transactions post-FA 2023. Get a robust, independent valuation (RICS valuation for property-backed businesses; qualified accountant/corporate finance valuation for trading companies). (2) CONNECTED PERSON TRUSTEES: the former owner and/or connected persons (spouse, adult children) must not form a trustee majority post-FA 2023. (3) CHANGE OF COMPANY ACTIVITIES: if the company changes from trading to investment (property portfolio, holding investments): the EOT controlling interest may no longer qualify — the company must remain a trading company. (4) BREACH OF CONTROLLING INTEREST: if the EOT's stake falls below 50% (due to new share issues, buybacks, or disposals): the EOT qualifying conditions may be breached. (5) DEFERRED CONSIDERATION DEFAULT: if the company becomes insolvent and cannot pay the deferred consideration: the former owner loses part of their sales proceeds. Professional financial advice is essential. CONSULTATION: HMRC has issued guidance on EOTs (HMRC Enquiry Manual EM3000 series). Specialist solicitors and tax advisers with EOT experience are essential — the conditions are complex and the stakes are high (loss of CGT and IHT relief could mean £millions of unexpected tax). |
Employee Ownership Trusts and IHT UK 2026. s28A IHTA 1984 (introduced Finance Act 2023): a transfer of value made by an individual on or after [commencement date] is an exempt transfer if — (a) it consists of shares in a company; (b) as a result of the transfer, the trustees of a settlement hold a controlling interest in the company; (c) the settlement meets the 'all-employee benefit requirement'; and (d) the settlement meets the 'equality requirement'. s236H TCGA 1992 (introduced Finance Act 2014; amended Finance Act 2023): CGT exemption for disposal of shares to an EOT — where an individual disposes of shares in a company and the conditions in ss236I-236U are satisfied, no chargeable gain arises. s236I TCGA: controlling interest condition — the trustees must hold (or, as a result of the acquisition, will hold) a controlling interest in the company (more than 50% of ordinary share capital, voting rights, and rights to income and assets on winding-up). s236J TCGA: the 'all-employee benefit' requirement — the trust deed must provide that the settled property is held for the benefit of all eligible employees of the company on equal terms. s236K TCGA: 'eligible employees' = those who have worked for the company for at least 12 months. s236L TCGA: equality requirement — the benefit must not be variable by reference to remuneration, position, or length of service beyond a permitted degree. s312A ITEPA 2003: income-tax-free bonus payments — where an EOT holds a controlling interest, the company may pay each eligible employee a tax-free bonus of up to £3,600 per year (increased from £3,200 in 2014); the bonus is exempt from income tax but NOT exempt from National Insurance contributions. Finance Act 2023 amendments (effective 1 October 2023): (a) former owner trustee restriction — connected persons of the former owner must not constitute a majority of EOT trustees at any time; (b) market value restriction — the EOT trustees must not pay more than market value for the shares; (c) clawback provisions — if the EOT disposes of the controlling interest within a specified period after the original acquisition, the former owner's CGT relief may be clawed back; (d) no disqualifying conditions — the trust deed must not include provisions that would allow former owners to direct how trust property is applied contrary to the all-employee benefit requirement. Finance Act 2026 BPR cap: s104 IHTA 1984 (BPR) combined with APR is capped at £1m per transferor from 6 April 2026. The s28A IHTA EOT exemption is NOT BPR — it is a separate exemption unaffected by the £1m BPR cap. HMRC guidance: Employment-Related Securities Manual (ERSM) and HMRC's published guidance on EOTs (published post-FA 2023). Companies Act 2006: an EOT is established under a trust deed — not a statutory company structure. The EOT holds shares in the company; the company's articles of association may need amendment to accommodate the EOT holding. Succession planning: the EOT is irrevocable once established — the controlling interest cannot be re-acquired by the former owner without HMRC approval (breach of the no-disposal restriction). The former owner receives deferred consideration (an unsecured loan note from the EOT) which is funded from company profits over a period of years (typically 5-10 years).
Frequently Asked Questions
What is an Employee Ownership Trust and how does it save IHT?
An Employee Ownership Trust (EOT) is a trust that holds a controlling interest (over 50%) in a company for the benefit of all employees. Finance Act 2023 introduced s28A IHTA 1984: transfers of shares to a qualifying EOT are EXEMPT FROM IHT. The exemption is immediate — unlike a Potentially Exempt Transfer (PET), there is no 7-year survival period required. The controlling shares leave the owner's estate without IHT and without a clawback period. Combined with zero CGT on the disposal (s236H TCGA 1992 — Finance Act 2014), the EOT is one of the most tax-efficient business exit strategies available to UK company owners. Qualifying conditions: the EOT must acquire a controlling interest; all eligible employees must benefit on equal terms; former owners must not form a trustee majority; the EOT must pay no more than market value.
Is CGT payable when selling shares to an Employee Ownership Trust?
No — a qualifying disposal of shares to an EOT is completely CGT-free under s236H TCGA 1992 (Finance Act 2014, tightened by Finance Act 2023). The entire capital gain (however large) is exempt. There is no cap on the gain that can be exempt — a gain of £50m on an EOT disposal would be fully CGT-free. Qualifying conditions must be met: controlling interest acquired by the EOT; all-employee benefit; equal terms; former-owner trustee restriction (post FA 2023); market value consideration only. Unlike Business Asset Disposal Relief (BADR), there is no limit on the gain, no 2-year trading requirement, and the seller does not need to be an employee. The CGT relief and IHT relief under s28A IHTA are linked: both require the same qualifying conditions.
Does an EOT have to pay market value for the shares?
Yes — Finance Act 2023 (effective 1 October 2023) requires EOT trustees to pay no more than MARKET VALUE for the company shares. This was introduced to prevent inflated valuations that maximised the seller's consideration while leaving the EOT (and thus the employees) with an unsustainable debt burden. If the EOT pays above market value: the CGT relief is denied for the excess (and the IHT s28A exemption may be compromised). The market value must be independently verified — HMRC scrutinises EOT valuations and may open enquiries into transactions where the price appears above market. In practice: obtain a formal valuation from a qualified corporate finance adviser or accountant, documented before completion.
Can a former business owner remain as a trustee of an EOT after FA 2023?
Yes, but with restrictions introduced by Finance Act 2023 (effective 1 October 2023): former owners (and persons connected with them — spouses, adult children) must NOT constitute a MAJORITY of EOT trustees. If there are three trustees, the former owner plus one connected person = two of three = a majority: DISQUALIFIED. Solutions: ensure at least half the trustees are independent (unconnected employee representatives or professional trustees). The former owner can still be a trustee — they just cannot be the majority. This restriction was introduced to prevent former owners retaining practical control of the company through the EOT trustee board while enjoying full CGT and IHT relief.
What happens to BPR after Finance Act 2026 in an EOT structure?
EOT relief (s28A IHTA) is entirely separate from BPR (s104 IHTA) and is NOT subject to the Finance Act 2026 £1m combined BPR/APR cap. The controlling interest transferred to the EOT is IHT-exempt under s28A — that exemption is uncapped. If the former owner retains a minority stake (e.g., 49%): that retained stake may qualify for BPR (100% if the trading test is met) — but from 6 April 2026, only the first £1m of BPR value per transferor gets 100% relief; above £1m gets 50%. For very valuable retained stakes above £1m: the excess faces IHT at 20% (40% × 50% BPR). EOT planning is therefore even more attractive post-FA 2026 than before: it removes the bulk of the company value from the estate without relying on BPR and without being capped.
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