MBOs, EOTs and succession

The main options are a management buy-out, where your existing managers buy the company, a sale to an Employee Ownership Trust, passing the business to family, or a company purchase of your shares. Each has a different tax result, funding model and level of ongoing involvement. Comparing them side by side, including with a trade sale, is the best place to start.

A management buy-out is the sale of a company to its existing management team. The managers usually set up a new company to buy the shares, funded by their own money, bank debt, private equity or deferred payments to the sellers. For the sellers, the sale is usually taxed as a capital gain, often with Business Asset Disposal Relief available if the conditions are met.

The trust holds a controlling interest on behalf of all eligible employees, rather than employees owning shares directly. The trustees oversee the company, while management continues to run it day to day. Since 30 October 2024 the trustees must be UK resident and the former owners cannot control the trust. Employees can then receive tax-free bonuses of up to £3,600 a year each.

You can gift shares during your lifetime, sell them to your children, or leave them in your will. A gift can be treated as a disposal at market value for capital gains tax, although reliefs may be available. For inheritance tax, Business Relief gives 100% relief on the first £2.5m of combined qualifying business and agricultural property per person from 6 April 2026, and 50% above that.

There is no single answer. Lifetime gifts can reduce your estate but may create a capital gains tax charge now, and you lose control of the shares. Leaving shares in your will keeps control, but the value above the Business Relief limit may face inheritance tax at 40% after the 50% relief. The right mix depends on the value, your family and your plans.

A management buy-in is where an outside manager or team buys the company and takes over running it, often with private equity or bank funding. For the sellers, the tax treatment is broadly the same as any sale to a third party. The buyers will usually carry out fuller due diligence than an existing management team would, because they know the business less well.

It depends mainly on funding, valuation and how prepared the business is. Many MBOs and EOT sales use HMRC clearances, and HMRC responds to the main statutory clearances within 30 days, so applications should be built into the timetable. Starting the tax planning early, before terms are agreed with the managers or trustees, avoids delays later.

In MBOs and EOT sales, part of the price is often paid over time from the company's future profits. For sellers, a fixed deferred payment is usually taxed as part of the gain at completion, even though the cash arrives later. This creates a risk of paying tax on money you may not receive in full, so the payment terms and security need careful thought.

The biggest risk is that the price depends on the company's future profits, so payments can be delayed or reduced if trading falls. Sellers may also stay closely involved, which can blur the line between owner and employee. For an EOT, relief can be clawed back if the conditions stop being met within the clawback period, which became longer from 30 October 2024.

Yes. You can sell in stages, sell a controlling interest and keep a minority stake, or stay on as a director or employee for a period. Each option affects your tax. Business Asset Disposal Relief needs you to be an officer or employee for the two years before each sale, and after an EOT sale former owners cannot control the trust.