EOT Qualifying Rules Explained - 2026 Update

Updated August 2026

An Employee Ownership Trust, or EOT, is one of the best and most tax efficient ways to sell a business, providing the right conditions are met. However, like any exit strategy, an EOT might not be the right choice for every business. There are strict EOT qualifying rules in place to ensure the transaction is made for the right reasons by the right businesses.

This article runs through the current EOT qualifying rules, the anti-avoidance changes introduced from October 2024, and the 2025 change to the Capital Gains Tax (CGT) relief itself. Failure to meet any of these conditions will disqualify your business from the EOT route. The good news is a trusted EOT adviser can help you ensure you and your business qualifies long before starting.

Employee Ownership Trust qualifying rules

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Trading companies only

The company being sold to an EOT must be either a trading company or the main company of a trading group of companies. In other words, the company must be actively engaged in business and not a just used for investments or holding activities.

All employees must benefit

For the full suite of benefits to apply, and for the EOT to succeed, it must be set up for the benefit of all employees, regardless of seniority or salary. To ensure fairness, the trustees of the EOT must make sure that any company shares held by the trust are used to benefit all eligible employees in the same way.

Controlling interest is mandatory

The EOT must own a controlling interest in the company once the transaction has included. This means more than 50%. In other words, owners wanting to sell 30% of their business cannot do so to an Employee Ownership Trust.

Excluded participators

The majority of trustees of the EOT must not be shareholders (or former shareholders) who own or are entitled to own 5% or more of the company directly. These are known as “excluded participators”.

UK residence

The trustees must be UK resident and retain a controlling stake in the company on an ongoing basis.

The 40% rule for shareholding directors

When the EOT is set up, the number of shareholding directors or employees must not make up more than 40% of the total employee count for the company or group.

Additional EOT eligibility criteria - Introduced from October 2024

Following a government consultation launched in 2023, several new EOT qualifying rules took effect for disposals made on or after 30 October 2024 (Autumn Budget 2024, later confirmed in Finance Act 2025). These rules are intended to prevent the EOT route being used for the wrong reasons – the good news is, if your business is suitable for an EOT, these rules are unlikely to affect you.

The government introduced the following EOT rules to ensure that Employee Ownership Trusts continue to provide unique benefits to the employees of businesses, as well as the industry and community in which they operate.

Existing shareholder control

Exiting shareholders (or people connected to them) can no longer retain control of the EOT (and therefore the business) after the sale completes, whether directly or through their position as trustees.

UK resident trustees

EOT trustees must be UK resident at the time of disposal.

Market Value Rule

The price of company shares cannot exceed the fair market value, as determined by an independent valuation.

Additional information

Additional information will need to be provided to HMRC to claim the relief from Capital Gains Tax, so qualified tax advice is essential.

Director exclusion from bonuses

Company directors can now be excluded from the tax-free annual bonuses paid to employees of EOT-owned companies. Previously, if bonuses were paid, directors had to be included on the same terms as everyone else.

Contributions to the EOT are treated as a distribution

Company contributions used to repay the former owners for their shares are treated as a distribution (a payment from a company to its shareholders) for tax purposes. Since 30 October 2024, this is balanced by a dedicated Income Tax relief that prevents these contributions being taxed as income in the hands of the trustees.

The big change: Capital Gains Tax relief

Since the Capital Gains Tax relief for EOT transactions was introduced in 2014, a qualifying disposal of a business to an EOT was subject to 100% Capital Gains Tax relief. The government changed this in the 2025 Autumn Budget.

The Capital Gains Tax relief is now 50%, not 100%.

What happens if the EOT rules are broken?

These conditions must be met both before and after the EOT transaction takes place. If any of the rules are broken, the tax benefits of the EOT route will be lost. This is why it is so important to seek qualified accounting, tax, and legal advice when exploring an EOT sale. This is also why it's so important to ensure the EOT route is being pursued for the right reasons and not just as a tax saver.

The government's four-year tax recovery period

It is especially important to continue to meet the EOT qualifying rules after the transaction has completed. This is due to the four year vendor clawback period enforced by the government. This means that HMRC can recover tax from the exiting shareholders (the ones who initially benefitted from 50% Capital Gains Tax relief as of November 2025) if any EOT rules are broken within four years of the transaction.

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Interested in EOT? Download our complete guide today

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Sources for this blog

• HMRC, Capital Gains Tax — Employee Ownership Trusts relief reduction, published 26 November 2025
• HMRC, HS277 Employee Ownership Trusts and Capital Gains Tax (2026)
• HMRC, Taxation of Employee Ownership Trusts and Employee Benefit Trusts, updated 6 November 2024
• HMRC Capital Gains Manual, CG67800–CG67856 (Employee Ownership Trust reliefs)

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_{This article is general information, not personalised tax or legal advice. EOT rules are detailed and fact-specific — speak to a qualified EOT adviser before acting on any of the above.}