New employee-owned trusts fall to four-year low
The number of employee‑owned businesses receiving tax clearance fell to a four‑year low in Q1 2026, according to data obtained by Price Bailey accountancy firm.
Data released by HMRC under the Freedom of Information Act showed that only 90 employee ownership trusts (EOTs) received tax clearance in the first quarter of this year, the lowest figure since Q2 2022, when 79 were authorised.
The fall followed two strong surges in late 2024 and late 2025, when business owners accelerated transactions ahead of expected Budget changes to the EOT regime.
An employee ownership trust is a special form of employee benefit trust introduced by the coalition government in 2014 to encourage wider staff ownership and engagement. The structure has historically offered sellers significant capital gains tax (CGT) advantages with employees able to receive tax-free cash bonuses of up to £3,600 per year.
Employee ownership
Tax relief cut makes employee ownership trusts ‘far riskier’
Price Bailey said that the Budget 2024 reforms – including a four‑year CGT clawback period, tighter rules on trustee funding, and the reduction of CGT relief from 100% to 50% from November 2025 – have fundamentally altered the risk landscape for business owners considering an EOT.
Simon Blake, partner at Price Bailey, said: “The rush to complete deals before the Autumn Budgets created two artificial peaks in late 2024 and late 2025. While Q1 2026 is likely temporary pipeline exhaustion, the new rules mean volumes are unlikely to return to their previous long-term averages unless future Budgets restore some of the earlier advantages.”
“The four‑year CGT clawback can be triggered by events outside the seller’s control. Breaches can arise if the trust stops operating for the benefit of all eligible employees, if rewards disproportionately favour a subset of staff, if former owners regain influence, or if company contributions are used for non‑qualifying purposes.”
Under the revised rules, company contributions to an EOT are now taxable by default, unless they fall within a narrow definition of “qualifying acquisition costs”.
This increases the complexity of funding structures and may encourage some businesses toward alternative ownership models such as management buyouts or employee benefit trusts.
Blake added: “We are still seeing EOT transactions, but sellers who prioritise certainty, control or flexibility may now find that an MBO or hybrid structure is a better fit than a trust‑based model with a four‑year qualification window.”
The firm also noted that the macroeconomic backdrop is weighing on deal activity. Despite interest rates falling to their lowest level in two years, the lagged impact of high borrowing costs and weaker productivity growth continues to depress valuations and cash‑flow projections, both key ingredients for structuring sustainable EOTs.
Blake said: “Mid‑market M&A is showing signs of recovery, but some of that activity is being driven by fears of further tax rises. For certain founders, a clean sale with upfront cash and fewer post‑sale obligations is now more attractive than the deferred, trust‑based EOT model.”
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Source: www.personneltoday.com