This is the first instalment in our series of insights exploring why Employee Ownership should be considered. In this insight, we explore Capital Gains Tax (“CGT”).
The landscape of Capital Gains Tax for business owners has changed a lot in recent years, with significant implications for those looking to sell shares in trading companies or groups. Historically, Business Asset Disposal Relief (“BADR”) offered substantial tax savings, making it an attractive option. However, recent changes and rules have progressively limited the benefits of BADR, increasing the effective tax rates on gains and reducing net receipts for sellers. We examine the evolving tax regime, including the rising appeal of Employee Ownership Trusts (“EOTs”) as a tax-efficient alternative.
As a reminder, an individual owning shares in a trading company/group worth £10m (before 2020) could have sold these shares with the benefit of BADR to a third party and paid less than £1m in tax. A £9m net receipt and 10% tax rate was very attractive.
In recent years, BADR was only available on gains of up to £1m, so the same individual would have paid tax at 10% on the first £1m of gains (so, £100,000) and 20% on the next £9m of gains (so, up to £1.8m). This means total tax of £1.9m and take-home funds of £8.1m. Still a good result at 19% tax.
Fast forward to the new rules from the Budget, and a higher rate taxpayer can expect to pay CGT at 14% on the first £1m of gains (so, £140,000) and 24% on the next £9m of gains (so, up to £2.16m). This means total tax of £2.3m and cash in the bank of £7.7m - an effective rate of 23%. From 6 April 2026 the rules become more onerous still, with CGT at 18% on the first £1m of gains (so, £180,000) and 24% on the next £9m of gains (so, up to £2.16m). This means total tax of £2.34m and cash in the bank of £7.66m - an effective rate of 23.4%.
Whilst 23.4% is not a terrible tax rate (when compared to income tax rates) it is clearly going to mean significant reductions in net funds when compared to the old 10% rate and the £9m net funds that a vendor would once have enjoyed.
The new rules will mean that from 6 April 2026 BADR will provide a maximum saving of just £60,000 compared to the tax savings it once provided of up to £1m. This trajectory suggests BADR is likely to be phased out altogether in the not too distant future. Of course, CGT rates may increase further and there had been speculation they would align with income tax rates (up to 45%), although the government may have decided that 24% is the sweet spot for collecting tax without deterring people from selling assets or persuading them to become non-resident before they do.
Despite the frightening direction of travel on CGT, the government has continued to support EOTs, and it remains possible to sell one’s company’s shares to an EOT without a CGT bill arising. So, in the same example, £10m received, £0 tax, £10m in the bank, and £2.34m of tax saved compared to a third-party sale. The EOT relief remains uncapped despite some concern that it might be limited to the first £1m of gains. We may see the EOT CGT relief eventually being scaled back in similar fashion to BADR but for now there is still a great opportunity for business owners to utilise the relief (though, sadly, the gains are likely to eventually be taxed on the EOT trustees due to new EOT rules – see below).
Clearly a 0% tax rate is hard to beat, but vendors must appreciate that the funds will typically need to come from the company unless borrowings can be obtained. This usually makes a third party-sale preferred but the risk/benefit analysis is now yielding more attractions for an EOT.
The path of BADR and CGT rates highlights a challenging environment for business owners planning to sell their companies. While the days of 10% tax on gains are firmly behind us, the increasing tax burden has sparked renewed interest in alternatives like EOTs, which continue to offer unparalleled tax relief for now. Of course, CGT savings should not be the sole focus of Employee Ownership and will usually be a secondary concern, but as the tax landscape grows more complex and less forgiving, we must weigh the costs and benefits of different sale structures to optimise financial outcomes. With further changes likely on the horizon, strategic planning and professional advice are more critical than ever.
