EOTs gain traction with succession and productivity gains: BDO

BDO Share Plans and Incentives national head Matthew Emms said that employee ownership trusts (EOTs) have experienced rapid growth in popularity in recent years.

He noted that this increase is due to their role in supporting succession and exit planning for founders, as well as delivering benefits to businesses through enhanced employee engagement, retention, and productivity outcomes aligned with the original aims of EOTs.

The UK government reduced the statutory capital gains tax relief from 100% to 50% for shareholders selling to EOTs.

This change alters the incentives for business owners considering employee ownership models, affecting succession planning and share disposal strategies.

Introduced to increase employee engagement and widen share ownership among staff, EOTs previously allowed owners to sell shares without incurring any capital gains tax.

From late 2025, only half of the gain realised from these disposals will qualify for tax relief.

Emms said: “Following a Government review last year, sensible and widely requested reforms were introduced at the last Budget to ensure that new EOTs are structured in such a way that they embrace the spirit as well as the letter of the law – and in line with good corporate governance.

He added: “As these latest changes take effect immediately, they will be particularly problematic and unfair for those shareholders that were in the process of selling their business to an EOT – or who have had conversations with their employees about selling their business to them – but haven’t yet completed the transaction on the basis that a key commercial term has now been changed.

“It would have been much better if the Government had consulted on these proposals before they took effect in the way in which they did with the previous changes in 2023.”

It was noted that, based on their experience, business owners appreciated the opportunity to sell to an EOT, as many were genuinely interested in transitioning their business to an employee-owned model.

There was a concern expressed that the recent changes could reduce enthusiasm for EOTs, although it was emphasised that EOTs would continue to offer significant benefits for both selling shareholders and employees.

Alongside adjustments to EOT rules, the government has announced changes to enterprise management incentive (EMI) share option schemes.

Effective April 2026, eligibility criteria will be widened and the maximum number of employees permitted under EMI will double from 250 to 500.

Asset thresholds will rise from £30m ($39.68m) to £120m.

Companies can grant an increased total value of shares under EMI, from £3m to £6m across all participants.

The maximum duration for option terms will extend from 10 to 15 years.

Emms added: “While the changes to EOTs were disappointing, the reforms to EMI share options schemes are very welcome indeed. They will make EMI schemes more accessible and attractive to a much greater number of companies and offer substantial tax advantages to companies and their employees. The changes will also provide much greater scope for UK companies to compete with the US in the war for global talent.

It was stated that, from April 2027, the EMI notification requirement would be removed, leading to a reduction in compliance risk and administrative burden

It was also indicated that EMI options would retain access to favourable capital gains tax treatment, potentially including Business Asset Disposal Relief, which would help maintain their status as an attractive incentive tool.

He further said: “What’s perplexing is the inconsistency - relaxing tax breaks on the one hand to incentivise key employees to acquire shares in their company yet restricting tax breaks for companies moving to an all-employee ownership which is something the Government has previously actively promoted.”

"EOTs gain traction with succession and productivity gains: BDO " was originally created and published by The Accountant, a GlobalData owned brand.

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