The IHT sting of EOT receivables
14th November 2025
Posted in Articles by Michelle Hogan
The Employee Ownership Trust (EOT) tax provisions were enacted in 2014, as a way to encourage long-term employee ownership in businesses, the benefits of which sought to boost the economy through enhanced employee engagement, motivation and the stability of having an independently owned company.
Amongst other benefits, the tax incentive for shareholders is compelling – an opportunity to sell a controlling stake completely free from capital gains tax (CGT).
Put simply, how do they work?
• An EOT is established for the benefit of the company employees, usually governed by a corporate trustee.
• The EOT buys a controlling stake in a trading company from the shareholders at market value. If all the qualifying conditions are met, the disposal is free from CGT for the vendor.
• The share consideration is often deferred in part and is financed by distributions made by the company out of its existing and future reserves.
What are the practical considerations?
With the passage of time some post-EOT ‘challenges’ are coming to light, which highlights the need for a strong commercial motivation behind an EOT sale and a cautious approach in thinking about longer term tax consequences.
Example
John is 50 and owned 100% of the shares in a niche precision-engineering business which he started from scratch many years ago. With 25 skilled employees, John considered selling to a buyer but felt they would fundamentally change the business he has nurtured and wanted to ensure the best for his team. He was also attracted by the prospect of a tax-free sale.
In summer 2024, having taken advice, John sold all of his shares to an EOT for £6m. He asked his accountants to prepare a valuation to support the sale, based on John’s somewhat ‘optimistic’ projections for the profits. The EOT paid him £2m up front, financed from company contributions out of its distributable reserves. The remaining £4m was left owing and payable over the next four years, subject to there being sufficient profits. He continued working as a director alongside his fellow directors.
A few months ago, John was diagnosed with terminal cancer and is concerned about the exposure to inheritance tax on his estate.
The issues
• Before selling his shares, they qualified for 100% Business Property Relief (BPR), although from 6 April 2026 this will be capped at £1m, with 50% relief thereafter.
• This value has now been replaced by £2m in cash (subsequently reduced by John’s mortgage repayments and spending) and a £4m receivable.
• The £4m receivable is an asset in his estate. It does not qualify for BPR and so is exposed to inheritance tax at 40%, i.e. a potential liability of £1.6m.
• John also regrets his ‘over enthusiastic’ company valuation. His executors could report that the £4m receivable in his estate is actually worth far less, based on revised projections.
• However, if they are successful, HMRC may well challenge the original valuation and seek to recoup capital gains or income tax on the inflated proceeds when the shares were sold to the EOT.
Forbes Dawson view
Not only is valuation key when selling to an EOT, but also the longer-term implications of giving up shares in exchange for a receivable:
• Finance Act 2025 introduced certain measures to strengthen the commercial motivations behind EOT ownership, including the requirement that shares are sold at market value to the EOT. Although this was already inherent in the provisions – after all the trustees are obliged not to overpay for shares – there is no mechanism to seek agreement on the share valuation with HMRC when an EOT structure is set up and therefore the incentive to inflate valuations was clearly considered a risk. Vendors should seek independent, robust, and realistic valuations which will support a disposal if challenged by HMRC.
• It is also important to consider the wider implications of a sale, especially where proceeds are payable by the EOT over a longer period of time than may be the case for a third-party sale. Converting an asset (such as shares), which qualifies for BPR into one which doesn’t (a receivable), potentially creates an unexpected inheritance tax issue.
• John’s executors will have the interesting job of valuing a receivable at a point in time when the timings of future cash flows will be uncertain.
