My clients, a middle-aged husband and wife, have a successful and profitable import business which has accumulated cash and investments over a number of years. They had a wish to divest themselves of the company perhaps to management.
The changes to the rules around agricultural property relief and business relief (BPR) were a concern and HMRC’s hardening attitude to Employee Ownership Trusts (EoT) came into focus following the November 2025 budget.
The company was not ready for disposal due to the presence of minority share interests and also significant investment assets. The minority interest was repurchased at an agreed value for cash consideration. The second step was to consider how the investment assets could be separated from the business at a reasonable cost. After consideration, the mechanism chosen was a capital reduction demerger.
The final step was to dispose the trading company to an EoT at a valuation provided by a professional valuer, with consideration to be partly paid from future trading cash-flow. The imposition of a 12% Capital Gains Tax charge in the November 2025 budget reduced the tax advantages but overall the client agreed that an EoT disposal remained the best option to achieve their objectives.
The demerger allowed the client to retain their interest in the investment assets without incurring significant liability to taxation. The trading asset remaining was then suitable to be sold to EoT at a reduced rate of CGT (compared to a third-party trade sale).
Overall, the client exchanged an asset which potentially would not have benefitted from BPR, due to the scale of investment assets, for one which will provide them with cash proceeds at an acceptable tax cost. Surplus net cash proceeds can be potentially given to family members in the future subject to an insurable risk to Inheritance tax.
The EOT structure, allows them to retain influence in key business decisions in the medium term. The investments, now in an investment company can be potentially gifted or wound down in due course.