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The decision to raise taxes on sales of businesses to employees will deliver a further blow to UK entrepreneurs and deter older owners from selling on, advisers have warned.
Employee ownership trusts (EOTs) previously allowed business owners to avoid capital gains tax (CGT) when they sold their companies to a trust held by workers.
But in Wednesday’s Budget the government cut CGT relief on EOT sales from 100 per cent to 50 per cent. The Office for Budget Responsibility estimates the change will bring in £900mn a year from 2027-28 onwards.
Business advisers said the cut in tax relief had come with no warning or consultation, which typically accompanies policy changes, and would cause disruption for many companies preparing to transition to EOTs.
The vehicles, akin to the John Lewis-ownership model, have grown rapidly in popularity since they were first set up in 2014.
They gained further steam after last year’s Budget, which raised CGT and cut inheritance tax breaks on business assets. Over 550 businesses transitioned to EOTs in 2024, a 26 per cent increase on the year before, according to the Employee Ownership Association (EOA).
The government had “clearly been driven from a cost perspective without necessarily thinking about the benefits”, said Chris Etherington, a tax partner at accountancy firm RSM.
A 2023 study commissioned by the EOA found that businesses owned by employees were 8 to 12 per cent more productive than non-employee owned businesses and delivered twice as much in bonuses and dividends to workers.
“This was one of the few tax reliefs from a CGT perspective that was operating to drive productivity and growth,” said Etherington.
Advisers warned that the changes could leave entrepreneurs having to foot a tax bill before they received the proceeds of their sale. Once an EOT sale is completed, the trust typically pays founders an initial lump sum and returns the remainder in instalments taken from the company’s profits over several years.
“Our main concern is that the transaction no longer works out financially and commercially for some owners,” said Etherington. “It’s still a really positive structure for businesses to consider because of benefits to workplace culture and productivity [but] this will dampen enthusiasm.”
EOTs had become especially useful for ageing small business owners who might otherwise shutter their companies. Changes to inheritance tax announced last year made it more difficult for entrepreneurs to pass on companies to family members and EOTs offered an avenue for their businesses to live on.
Advisers expressed frustration that the relief was cut just as EOTs had begun to gain traction and only a year after a previous government review of the vehicles that tightened the terms under which sellers qualified for CGT exemptions.
Matthew Emms, a tax partner at accountancy firm BDO, noted the changes came in a Budget that also expanded the scope of the Enterprise Management Incentives scheme, an employee share options scheme boosted by tax breaks.
“They’re encouraging employee ownership on one hand and curtailing it on the other,” he said. “This feels like a short-term way to get money in.”
The Treasury was approached for comment.
