Transferring a controlling interest in your trading company to an Employee Ownership Trust is an exempt transfer for inheritance tax under Section 28A of the Inheritance Tax Act 1984. The shares leave your estate on the day the transfer completes, with no seven-year survival rule and no 20% entry charge. The EOT inheritance tax exemption is one of the largest reliefs available to a UK business owner, but it depends on meeting precise qualifying conditions at the point of transfer and keeping the trust compliant afterwards.1Legislation.gov.uk. Inheritance Tax Act 1984 – Section 28A
Why the Exemption Is So Valuable
Two other transfer categories usually apply when you move business assets. A gift to another individual is a potentially exempt transfer: give it away, survive seven years, and it drops out of your estate; die sooner and it is pulled back and taxed at up to 40%.2GOV.UK. How Inheritance Tax Works: Thresholds, Rules and Allowances – Rules on Giving Gifts A transfer into a discretionary trust is normally a chargeable lifetime transfer, triggering an immediate 20% charge on anything above the £325,000 nil-rate band.3GOV.UK. Inheritance Tax Thresholds and Interest Rates
A qualifying transfer to an EOT sits outside both. The value can run into millions and the treatment is the same: exempt, immediately, whatever the size.4GOV.UK. Inheritance Tax Manual – IHTM42950 – Section: The Conditions
Conditions the Transfer Must Meet
Section 28A sets out the qualifying rules, and the underlying definitions come from the Taxation of Chargeable Gains Act 1992.1Legislation.gov.uk. Inheritance Tax Act 1984 – Section 28A
Trading Company or Trading Group Parent
The company must be a trading company, or the parent of a trading group. Investment companies, property holding vehicles, and other non-trading entities do not qualify. Most operating businesses clear this hurdle without difficulty, but a business carrying a large investment portfolio or substantial non-trading income can fall on the wrong side of the line.
All Eligible Employees Must Benefit
The trust must be set up for the benefit of all eligible employees, and any distributions must go out on the same terms. Employees with less than twelve months of service can be excluded, but you cannot pick and choose among the rest. Anyone holding a 5% or greater interest in the company, or who has held such an interest in the previous ten years, must be excluded from benefit, together with connected persons such as close family.
Trust Must Have a Controlling Interest
By the end of the tax year in which the transfer takes place, the trust must hold more than 50% of the ordinary shares, a majority of voting rights, entitlement to more than 50% of distributable profits, and entitlement to more than 50% of assets on a winding up.1Legislation.gov.uk. Inheritance Tax Act 1984 – Section 28A The trust does not need to hold that position the day before completion, but it must be there by 5 April of the relevant tax year.
Participator Exclusion in the Trust Deed
Section 28 adds a separate safeguard. The trust deed must not allow settled property to be applied for the benefit of anyone who is a participator in the company at the time of the transfer, who was a participator in the previous ten years, or who is connected with such a person.5Legislation.gov.uk. Inheritance Tax Act 1984 – Section 28 A participator is broadly anyone with a share or interest in the company’s income or capital. If the deed fails on this point, the whole exemption falls away, which is why explicit exclusion clauses are standard drafting.
Close Company Status
Most companies sold to an EOT are close companies: controlled by five or fewer participators, or by any number of participators who are also directors.6GOV.UK. Close Companies: General: Broad Definition That description covers most owner-managed UK businesses.
The older employee trust reliefs in the Inheritance Tax Act 1984, notably Section 86, were written for trusts of non-close companies.7Legislation.gov.uk. Inheritance Tax Act 1984 – Section 86 Finance Act 2014 introduced Sections 28A and 75A specifically to give close-company EOTs the same treatment, closing the gap for typical owner-managed businesses.8GOV.UK. Employee Ownership Trusts: Introduction
No Ten-Year Charges Once the Shares Are In
Standard discretionary trusts sit in the relevant property regime. Every tenth anniversary HMRC assesses the assets and charges up to 6% of value, and proportionate exit charges apply when assets leave between anniversaries.9GOV.UK. Trusts and Inheritance Tax – Section: Relevant Property
Property held on trusts that fall within Section 86(1) is not relevant property, so an EOT sits outside that regime entirely.10Legislation.gov.uk. Inheritance Tax Act 1984 – Section 58 Where shares are already held in a discretionary trust and moved into an EOT, Section 75A confirms no exit charge arises on that transfer, provided the trading, all-employee benefit, and controlling interest conditions are satisfied.11Legislation.gov.uk. Inheritance Tax Act 1984 – Section 75A
An EOT can therefore hold the company shares indefinitely without periodic tax erosion of the capital. For businesses meant to stay employee-owned across generations, that is the provision that makes the structure work in the long term.
The Deferred Consideration Trap
Most EOT sales are not paid in cash on day one. The trust typically borrows from the company or issues loan notes to the seller, then pays the price down over several years out of company profits. The exemption covers the shares you transfer in. It does nothing for the debt owed back to you.
If you die while consideration is still outstanding, the unpaid balance is an asset in your estate. It has a value, and that value is taxed at 40% above the nil-rate band. There is no mechanism to defer the inheritance tax liability to match the payment schedule, so beneficiaries can face a bill on money they have not yet received. Sellers commonly plan around this with life cover or by structuring the timing of payments, and it is worth factoring in from the start rather than after signing.
What Employees Own for Inheritance Tax Purposes
Employees of an EOT-owned company do not personally hold the trust shares. The trust is discretionary, so no individual employee has a fixed right to shares or their value. With no interest in possession, none of the trust’s value is attributed to any employee’s own estate.12GOV.UK. How Inheritance Tax Works: Thresholds, Rules and Allowances Payments made from the trust or the company to employees are taxed through payroll as employment income, not as capital.
How This Interacts With the 2025 CGT Change
Inheritance tax is only one part of an EOT sale. From 26 November 2025, only 50% of the seller’s gain qualifies for the capital gains tax relief on a sale to an EOT; the other 50% is chargeable, and Business Asset Disposal Relief and Investors’ Relief cannot be claimed alongside it.13GOV.UK. Capital Gains Tax – Employee Ownership Trusts Relief Reduction The inheritance tax exemption itself is unchanged, but if you are comparing an EOT sale to a trade sale or management buyout, use the current 50% figure rather than the pre-November 2025 full relief.
Keeping the Trust Qualifying After the Sale
The inheritance tax exemption on the original transfer is not clawed back if the EOT later falls out of compliance. The ongoing inheritance tax treatment of the trust assets, however, does depend on continuing to meet the Section 86(1) employee benefit conditions. If the trust stops operating for the benefit of all employees, the shares can become relevant property and start attracting ten-year anniversary and exit charges from that point.7Legislation.gov.uk. Inheritance Tax Act 1984 – Section 86
The seller’s capital gains tax relief carries a separate and stricter clawback. That window now runs to the end of the fourth tax year after the tax year of disposal. For a sale completing on 7 April 2026, a disqualifying event on or before 5 April 2031 causes full clawback.14GOV.UK. Taxation of Employee Ownership Trusts and Employee Benefit Trusts The events that trigger clawback are the ones that also matter for keeping the trust’s ongoing inheritance tax position intact:
- The trust drops below the 50% controlling interest threshold for shares, votes, profits, or winding-up assets.
- The trust starts excluding eligible employees or distributing benefits on unequal terms.
- The company ceases to be a trading company or trading group parent.
- The trustees cease to be UK resident.
- The trustees paid more than market value for the shares.
- For sales completing on or after 30 October 2024, former owners and persons connected with them make up half or more of the trustee directors.
The trustee independence rule is the newest of these and catches some sellers unaware. If you planned to serve as a trustee director alongside a spouse, adult child, or business partner, the board has to be structured so that former owners and their connected persons are a minority of the trustee directorship.14GOV.UK. Taxation of Employee Ownership Trusts and Employee Benefit Trusts