After the Budget: why employee ownership still makes sense

Today’s Budget did two things that matter to anyone thinking about selling a business. It announced a new Founders’ Relief that looks generous on its headline terms, and it halved the lifetime limit on Business Asset Disposal Relief (BADR). It left the main rates of Capital Gains Tax (CGT) alone, and nothing in the tax measures published today changes the CGT relief for a sale to an Employee Ownership Trust (EOT).

The obvious question is whether any of this changes the case for employee ownership. Our answer is that it sharpens it. The reason is only partly tax, but tax is where the Budget landed, so we start there.

Founders’ Relief: what is proposed, and why it is still only a proposal

Founders’ Relief is a proposed 10% rate of CGT on qualifying disposals of shares, up to a lifetime limit of £10m of gains per individual. It is aimed at founders and significant early investors in high growth, innovative UK companies, and is intended to apply to disposals made on or after 6 April 2027. The £10m limit would be reduced by anything claimed under the BADR and Investors’ Relief limits from that date.

It is not law. HM Treasury’s technical consultation closes on 30 November 2026, legislation is expected in Finance Bill 2026/27, and every condition described below is the Treasury’s proposal, not the final rule. The consultation asks directly whether the company conditions work as intended and whether there is a better test of innovation than R&D spend, so thresholds and tests may be loosened, tightened or replaced before anything is enacted.

The conditions on the company

The company conditions are where most owners will find the relief out of reach. As proposed, the company would need to:

• be within the scope of UK Corporation Tax, with a substantial UK presence for the five accounting periods before the disposal
• be a trading company, or the holding company of a trading group, without substantial non trading activities or excluded activities (the same exclusions as the Enterprise Investment Scheme, such as dealing in land, financial services and property development)
• still be carrying on the new trade it was established for, with no major change in its nature
• have turnover of at least £10m in the accounting period before the disposal
• have employed at least 15 qualifying full time employees in that period, meaning people working at least 35 hours a week and paid at least the National Minimum Wage, with directors, contractors and agency workers excluded.

The growth and innovation tests

On top of that, the company would need to pass at least two of three tests:

• Turnover growth: average compound growth of 25% a year across three consecutive accounting periods within the ten years before the disposal, starting from turnover of at least £10m.
• Headcount growth: the same 25% a year in full time equivalent employees, starting from at least 15.
• Innovation: at least £1.5m of qualifying R&D expenditure on which R&D tax relief has been claimed, for periods ending within the three years before the disposal.

What that means in practice

Growth of 25% a year for three years nearly doubles the starting figure. A company starting from turnover of £10m would need to reach roughly £19.5m, and one starting from 15 full time staff would need about 30. Because two of the three tests must be passed and only one of them is about R&D, a business that has grown steadily at 5% or 10% a year fails both growth tests and cannot qualify, whatever it spends on R&D. The company must pass the turnover and headcount tests together, or one of them alongside £1.5m of claimed R&D.

The consultation also flags a compliance risk. If HMRC later challenges the company’s R&D claim and a condition the founder relied on turns out not to be met, the founder would lose the relief and pay the tax with interest.

The conditions on the individual

The individual conditions are just as narrow. The founder would need to have held 25% of the company when its trade began, to have held the shares for at least five years, and to have been UK resident for at least five continuous tax years before the disposal. On the proposal as drafted, an owner who bought, inherited or was given the business later is unlikely to qualify.

Most owner managed businesses that have grown steadily rather than at 25% a year will not meet these tests as proposed. That is not a criticism of the relief, which is plainly aimed at scale ups. It is a reason not to assume that it applies to you. And because the detail is still under consultation, nobody can yet say for certain who will qualify when the Finance Bill is published.

Our advice is simple. Do not plan an exit around Founders’ Relief until the conditions are known, and treat every figure in this article about it as provisional. We will update this piece when the consultation outcome and draft legislation emerge.

How the numbers compare

The table below is illustrative only. It assumes a higher rate taxpayer, a main CGT rate of 24%, the whole gain sitting above the basic rate band, no annual exempt amount, and that every condition of each relief is met. For Founders’ Relief it uses the headline terms as announced, which may change. For the EOT it assumes that 50% of the gain is exempt, which is the current position. The BADR column uses the announced £500,000 lifetime limit from 6 April 2027 and assumes no previous use of that limit. The Founders’ Relief column assumes the full £10m limit is available and that gains above it are taxed at 24%.

Two things follow. First, if Founders’ Relief reaches your business in the form announced, it can beat the EOT on tax at lower levels of gain. We would rather say so plainly than have you find it elsewhere. Second, because the £10m limit caps Founders’ Relief and the EOT relief has no cap, the position reverses as gains grow. On the headline terms, above roughly £11.7m of gain the EOT is the lower tax outcome even against a fully qualifying Founders’ Relief claim. The EOT relief also does not depend on growth or innovation tests, and it is in force now rather than proposed for April 2027.

These figures compare tax only. They say nothing about price. A trade buyer may pay more, and an EOT price is paid out of future profits, which is why we tell owners to price against the bad year rather than the good one.

What happened to BADR

From 6 April 2027 the lifetime limit on BADR falls from £1m to £500,000 for qualifying disposals. Most owners weighing an EOT have always compared its relief with the tax on a third party sale where little or no relief was available, because BADR only ever covered the first slice of a gain that usually ran well beyond it. That comparison still holds, but the gap has widened. Until now, BADR has taxed the first £1m of a qualifying gain at 18% and the rest at 24%. From 6 April 2027 it will tax only the first £500,000 at 18%. For a higher rate taxpayer with a gain of £1m or more, the second £500,000 on a trade sale will therefore be taxed at 24% rather than 18%. That slice carries £120,000 of tax, against £60,000 under an EOT at an effective rate of 12%. The gap on it was £30,000 and becomes £60,000.

The government says three in four claimants will see no change, which is probably true and also beside the point for an owner whose gain is above £500,000. There are transitional provisions for certain contracts entered into before 6 April 2027 but not completed by then, so a trade sale already in train deserves a close look at the detail.

BADR cannot be claimed on a disposal for which EOT relief is claimed, so this change does not reduce the relief available on that route.

Management incentives: the EMI changes

Employee ownership does not stop a business giving its senior team a direct stake in future growth. Enterprise Management Incentives (EMI) options are a recognised way to do it, and a company controlled by an EOT is already treated as meeting the EMI independence test.

The EMI rules have moved twice in a year. From 6 April 2026, following the 2025 Budget, the gross assets limit rose from £30m to £120m, the employee limit from 250 to 500, the company wide limit on unexercised options from £3m to £6m, and the maximum exercise period from 10 to 15 years. Today’s Budget adds the following from 6 April 2027:

• Companies arranging to become controlled by an EOT keep access to EMI, extending the existing exception for companies already EOT controlled.
• The time allowed to exercise EMI options after a disqualifying event extends from 90 to 180 days.
• The Company Share Option Plan (CSOP), now to be called Enterprise Management Incentives 2 (EMI2), doubles its individual limit from £60,000 to £120,000 and extends its exercise period from 10 to 15 years.
• The link between the CSOP and EMI individual limits is removed, so an employee can hold the full amount under each scheme.
• Separate notification of EMI grants to HMRC goes for options granted on or after 6 April 2027, with grants reported through the end of year return instead.

We see all of these changes as positive. They widen the group of companies that can use EMI, give key people more room to build a meaningful stake, and make clear that employee ownership and direct share incentives belong together. The practical point for an EOT business is that the trust’s collective ownership and a direct stake for key managers can sit side by side. Whether EMI is right for a particular company depends on it meeting the other EMI conditions, and on the trust deed and governance allowing for it, so it needs designing alongside the EOT rather than bolting on afterwards.

What the Budget did not change

Most of the reasons owners come to us have little to do with the rate.

• A sale to an EOT needs no external buyer search or auction. Due diligence, warranties and other protections still need to be considered, but the process can be more focused and less intrusive than a trade sale.
• The business can preserve its name, culture and independence, while the owner has greater influence over the timetable.
• Employees can share in success through bonuses of up to £3,600 per employee per year free of Income Tax, subject to the usual conditions, with National Insurance still payable.

A moving target

EOT relief was halved last November. The BADR rate rose to 18% in April, and a cut to its lifetime limit has been announced today. Founders’ Relief has arrived with a consultation attached. That is a great deal of movement in a short time, and the lesson is not to chase whichever relief is newest.

A business sold to an EOT only for the tax is a poor EOT. A business sold because its owner wants to realise the value they have created and protect what they have built, and which also happens to attract relief, is a good one. The relief should support a sound transaction, not drive one.

What to do now

If you are weighing a trade sale, the arithmetic changes from April 2027 and your numbers need refreshing. If you are hoping for Founders’ Relief, wait for the consultation to conclude before relying on it. If employee ownership is on your shortlist, the case is as strong as it was yesterday and, in some respects, stronger.

We do not sell EOTs. We advise on them, and we will tell you plainly if another route is the right one. If you would like to talk it through, get in touch.

Further reading

• Founders’ Relief: technical consultation — HM Treasury
• Budget 2026 — HM Treasury
• Capital Gains Tax — Employee Ownership Trusts — HMRC

This article reflects the announcements available on 28 October 2026. Proposed measures remain subject to consultation and legislation. The examples are illustrative; the tax treatment of a transaction depends on individual circumstances.