Employee Ownership Trusts (EOTs) After Labour's CGT Cut: Legal Insight Into What Advisers Need To Know

Setting out this useful overview for financial advisers, Giorgio Pizzetti, Associate at Hunters Law LLP, uses his legal expertise to update us on how Labour's cut to capital gains tax relief on Employee Ownership Trusts reshapes succession planning. In his article below, Giorgio explains why EOTs remain a credible route to tax efficiency, continuity and long-term value.

Labour's 2025 budget introduced a significant change to succession planning: the halving of capital gains tax (CGT) relief on sales to Employee Ownership Trusts (EOTs). While this adjustment has raised concerns among business owners, it is far from the end of the road for employee ownership. For advisers, the priority is clear: help clients navigate this new landscape and make informed decisions about their exit strategy.

The key lies in understanding the options and reframing the conversation. Even with reduced relief, EOTs remain a valuable tool for succession planning. Advisers who grasp the technical details and strategic implications can guide clients toward solutions that protect value, maintain control, and deliver continuity. The benefits for employees, such as engagement and tax-free bonuses, are an added advantage, but the core focus is helping clients achieve their financial and legacy objectives.

The Policy Shift: What Changed?

EOTs were introduced in 2014 to encourage employee ownership, a model that promotes stability and engagement. Under the previous regime, qualifying sales to an EOT attracted 100% CGT relief. Labour's decision to cut that relief to 50% is a material adjustment, reducing the headline tax incentive that drove many founders toward this route.

However, even at 50%, the relief is substantial compared to most alternatives. A third-party sale typically incurs CGT at the full rate, alongside potential complications around valuation, deal structure, and cultural integration. Advisers should frame the change as a recalibration rather than a retreat.

Why EOTs Still Matter for Succession Planning

For advisers, discussions with clients should look beyond the headline tax change. EOTs continue to offer practical advantages for founders who want a structured, predictable exit without the uncertainty of third-party sales. They allow for continuity in management and operations, which many clients value when planning succession.

Employee ownership is an additional benefit rather than the main driver. While it can support engagement and retention, advisers should focus on the core rationale: helping clients achieve a tax-efficient, controlled transition that aligns with their long-term objectives.

The Engagement Dividend

Employee ownership is not just a governance model; it is a catalyst for performance. Research consistently shows that businesses with engaged employees outperform their peers. By giving staff a stake in the company's success, EOTs foster loyalty, retention, and productivity. These benefits compound over time, strengthening the enterprise long after the founder exits.

For advisers, this is a compelling narrative. In an era where talent retention is critical, EOTs offer a structural advantage that goes beyond the transaction.

Tax Benefits Beyond CGT Relief

While the CGT cut has captured attention, other tax incentives remain intact. Employees can still receive annual bonuses of up to £3,600 free of income tax, a meaningful perk that reinforces engagement. Inheritance tax exemptions also survive, providing additional planning opportunities for clients.

Advisers should highlight these benefits when discussing EOTs with clients. They are part of a broader package that makes employee ownership attractive even in a less generous CGT environment.

Adviser Considerations: Structuring and Compliance

EOT transactions are not without complexity. Qualifying conditions must be met, and the trust must hold a controlling interest in the company. Valuation, funding, and governance require careful planning. Advisers play a critical role in coordinating legal, tax, and financial expertise to ensure compliance and optimise outcomes.

This is where proactive advice adds value. By anticipating challenges and structuring deals effectively, advisers can help clients navigate the process with confidence.

The Bigger Picture: Why the Cut Could Hurt Employees

One unintended consequence of the cut to CGT relief is the potential impact on workers. If founders abandon EOTs, employees lose access to profit-sharing, tax-free bonuses, and a genuine stake in the business. Ironically, a measure aimed at taxing the wealthy may end up hurting the very people Labour seeks to support.

Advisers should bring this perspective into client conversations. EOTs are not just about tax; they allow clients to exit at market value with reduced tax exposure while creating an ownership structure that supports continuity and strengthens the client's legacy, with the added benefit of rewarding employees over the long term.

Conclusion: A Strategic Opportunity for Advisers

Labour's CGT cut is an important change, but it does not remove the value of EOTs as a succession planning option. Advisers have a key role in helping clients assess whether this route still meets their objectives and in structuring transactions effectively.

Succession planning is complex and requires more than a focus on tax. EOTs continue to offer a combination of tax efficiency, stability, and continuity that many founders find attractive. By understanding the mechanics and implications, advisers can guide clients toward solutions that protect value and support long-term goals.

Originally published by IFA Magazine.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.