Capital Gains Tax – Major Changes
Employee Ownership Trust (“EOT”) Relief
- Previous Rule: 100% CGT relief on qualifying disposals to an EOT.
- New Rule (effective Immediately – 26 November 2025):
Relief restricted to 50% of the gain.
The other 50% taxed at standard CGT rates (up to 24%), giving an effective rate of ~12% on the full gain.
Business Asset Disposal Relief cannot be claimed on disposals where EOT relief applies.
This measure is expected to raise £900m annually by 2029–30.
Business Asset Disposal Relief (“BADR”)
- Current: 14% from April 2025 on first £1m of qualifying gains (lifetime limit unchanged), then 24% on the remainder.
- From 6 April 2026: The rate changes to 18% on first £1m of qualifying gains (lifetime limit unchanged).
- This measure was announced in the 2024 budget and is unchanged.
What This Means
If you sell a business for £10m:
- Before 26 November 2025:
EOT sale: 0% CGT = £0 CGT
BADR sale: 14% on first £1m, then 24% on remainder = £2.3m CGT
- On/after 26 November 2025 until 5 April 2026:
EOT sale: 50% exempt, 50% taxed at up to 24% (effective ~12%) = £1.2m CGT
BADR sale: 14% till April 2026, then 18% on £1m, 24% on remainder=£2.34m CGT
- On/after 6 April 2026:
EOT sale → 50% exempt, 50% taxed at up to 24% (effective 12%) = £1.2m CGT
BADR sale → 18% on first £1m, 24% on remainder = £2.34m CGT
Overall CGT whether 24% or 12% (EOT’s) a mot more attractive than income tax rates.
Employee Ownership vs Trade Sale – Post-Budget Reality
Employee ownership remains more tax-efficient than a trade sale, but the dynamics have changed significantly following this Autumn 26-11-25 Budget 2025:
- Most EOTs are funded by loan notes, and under the new rules, CGT on the taxable portion (50%) is due upfront, even if consideration is deferred.
- There is typically up to 18 months’ grace as CGT is paid in the January following the end of the tax year of completion – so if completion is on 31 March 2026, tax will be due in January 2027, if completion is 30 April 2026, tax is due in January 2028- but cash flow planning is critical.
- Practically, as loan notes are often funded from what would have been dividends, some of the 40% tax saving sellers previously enjoyed by receiving loan note payments in place of profit share via dividends will now go towards covering the CGT bill.
- Early years of an EOT are no longer as lucrative for sellers because of this upfront tax cost.
- If you overpay CGT because loan notes are never fully paid, you can reclaim, but with many EOT deals spanning long durations, reclaiming is complex and delayed.
Inheritance Tax
Whilst not new in yesterday’s budget, an important reminder that Inheritance Tax (“IHT”) will, from April 2026 apply on shares in unquoted companies. The first £1m of qualifying assets → 100% relief (no IHT). The value above £1m → 50% relief, meaning an effective IHT rate of 20% on the excess (since standard IHT is 40%). Gifting shares, capital or in the case of an Employee Ownership sale, loan notes under potentially exempt transfers is a powerful tool to offset IHT
