The Budget delivers mixed messages on employee ownership
The Budget delivers mixed messages on employee ownership
Commenting on the changes to Employee Ownership Trusts and Enterprise Management Incentive share option schemes announced at the Budget, Matthew Emms, National Head of Share Plans and Incentives at BDO LLP said:
“There’s been exponential growth in the popularity of Employee Ownership Trusts (EOTs) in recent years as they’ve provided effective succession and exit planning opportunities for founders and substantial benefits to businesses through greater employee engagement, retention and productivity which is what the EOTs were designed to achieve – therefore, a real success story.
“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.
“It was therefore a surprise to see that further changes have been made to EOTs at the Budget this year which substantially cut the statutory CGT relief available to shareholders selling to an EOT (from 100% to 50%) – before the key changes from last year’s Budget have had an opportunity to embed.
“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.
“In our experience, business owners value the opportunity to sell to an EOT because they genuinely like the idea of transitioning their business to an employee-owned model. It would be a great shame if these changes were to dampen enthusiasm for EOTs which will continue to provide real benefits to selling shareholders and employees alike.
“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.
“In addition, the EMI notification requirement will be removed from April 2027, reducing compliance risk and administrative burden. EMI options will continue to benefit from favourable capital gains tax treatment potentially with Business Asset Disposal Relief, reinforcing their position as a competitive incentive tool.
“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.”
The changes announced at the Budget are summarised below:
Employee Ownership Trusts (EOTs)
The Government has announced that the statutory capital gains tax relief available to UK shareholders on disposals to Employee Ownership Trusts (EOTs) will be reduced to 50%, with immediate effect.
An EOT is a form of employee benefit trust introduced to encourage more shareholders to set up a corporate structure similar to the John Lewis model, with the aim being to facilitate wider employee-ownership. Formerly, shareholders were able to sell their shares in a business to an EOT without paying any capital gains tax, benefiting from 100% relief. With effect from 26 November 2025, however, business owners will only be able to claim relief from capital gains tax on 50% of the gain that they make when disposing of their shares to an EOT.
Enterprise Management Incentive (EMI) share option schemes
The Government is reforming Enterprise Management Incentive (EMI) share option schemes by significantly expanding eligibility and reducing administrative complexity. From April 2026, key thresholds will increase:
- the employee cap rises from 250 to 500,
- the gross asset limit from £30m to £120m,
- the total value of shares which a company can grant under EMI across all participants doubles from £3m to £6m, and
- the maximum option term will also extend from 10 to 15 years.
ENDS
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