Employee Ownership Trust Exit for a Property SPV: the Trading-Company Gating Constraint, the s.236M Controlling-Interest Test, and the FA 2025 Reforms

Employee Ownership Trust relief under TCGA 1992 ss.236H to 236U delivers no-gain-no-loss CGT treatment on the disposal of a controlling interest in a trading company to an EOT. The route is widely promoted as an exit option for owner-managed companies and frequently surfaces in landlord-portfolio planning conversations. For property businesses the answer is almost always no: the trading-company test at s.236I disqualifies the standard landlord SPV. Where the company does pass the trading-company gate (property development with active build-out, property management as a service business, property professional services like estate agency or surveying), the s.236M controlling-interest test must be met across four prongs at the more-than-50% threshold (not at least 50%), and the Finance Act 2025 reforms commencing 6 April 2025 add UK-resident trustee, independence-test, consideration-tightening, and extended-disqualifying-event-period requirements that have closed several pre-FA-2025 structuring patterns. The income-tax exemption for qualifying employee bonus payments sits at ITEPA 2003 ss.312A to 312I with a £3,600 per-employer-per-tax-year ceiling (subject to a pending FA 2026 uplift not yet in force at writing); the CTA 2010 ss.464M to 464Q range frequently cited in older commentary does not exist.

This page leads with the gating constraint because that is the operationally critical first question. The reference scenario where the route does work is the Patel-Properties Management Ltd case, an anonymised composite: a property-management service business managing 280 rental units across the East Midlands on behalf of third-party landlord clients, owned 50/50 by two second-cousin founders, with 14 employees. The founders propose an EOT exit in 2026/27 transferring 60% of the ordinary shares to the EOT while retaining 40% jointly. Patel-Properties is clearly trading (service revenue from external clients) and the s.236M four-pronged test is met by the 60% transfer. The page also walks the landlord-SPV cases where EOT does NOT apply, the FA 2025 reform architecture, and the comparison with the MVL exit route on the assumption that most property-business EOT enquiries should switch to the MVL track when the gating constraint bites.

The trading-company gating constraint: why most landlord SPVs are excluded

TCGA 1992 s.236I requires the company being disposed of to be a trading company or the holding company of a trading group. The definition imports from elsewhere in TCGA 1992 (the BADR / ER definition tradition) and from HMRC's Capital Gains Manual at CG65700 onwards. The case-law line on property letting as investment-not-trading runs through Pawson, Brander, and Personal Representatives of Pawson; the consistent outcome is that passive letting of property is investment activity, not trading activity.

The implication for landlord SPV structures. A buy-to-let portfolio held in a limited company (the standard 2025/26 incorporation outcome for s.24-affected individual landlords) is an investment company. Its disposal does not satisfy s.236I. EOT relief under s.236H is unavailable. The founder cannot use EOT as a CGT-deferral exit route. This is true whether the portfolio is residential, commercial, mixed, or specialist (HMO, BTR). Letting is letting; investment is investment.

The exception is property businesses with substantive trading activity beyond passive letting. Property development companies with active build-out (acquiring land, securing planning, undertaking construction, selling completed units) are trading because the build-and-sell cycle is a trade. Property management service businesses (managing rental portfolios for third-party landlord clients, charging management fees) are trading because the service provision is a trade. Property professional services (estate agency, surveying, architecture, planning consultancy) are trading because the professional service is a trade. Mixed companies with a substantive trading arm alongside an investment portfolio sit in a grey zone; HMRC's substance test looks at whether the trading activity is more than incidental. A 90% investment / 10% trading mix fails; a 60% investment / 40% trading mix may pass with careful structuring; a 100% trading mix passes.

The s.236M controlling-interest test: four prongs at more than 50%

For companies that pass the s.236I trading-company gate, the next test is s.236M's controlling-interest requirement. Section 236M requires the EOT trustees to acquire and hold a controlling interest across four prongs, each measured at the more-than-50% threshold.

• Ordinary share capital. Trustees hold more than 50% of the issued ordinary share capital (not at least 50%; equal 50/50 splits fail).
• Voting rights. Trustees' voting rights give them control on all questions affecting the company as a whole. Strict more-than-50% threshold.
• Profit entitlement. Trustees are entitled to more than 50% of the distributable profits. Where dividend rights are differentiated (alphabet shares, growth shares, preference shares), the profit-entitlement analysis applies to the actual profit flow.
• Winding-up assets. Trustees are entitled to more than 50% of the assets available for equity holders on a winding-up. Asset-on-winding-up rights are often the differentiator between ordinary and growth-share classes in family-company structures.

The four prongs are conjunctive: all must be met. A company with skewed voting rights versus profit shares (typical in older share-class structures) can pass three prongs but fail one; that is fatal to the s.236M test. Sessions advising on EOT structuring need to check all four prongs against the actual share-class architecture before committing to the transaction.

For the Patel-Properties case: the founders transfer 60% of the ordinary shares to the EOT, retaining 40% themselves jointly. The 60% covers all four prongs because the company has only one share class (ordinary shares with equal rights). Trustees hold 60% of ordinary share capital, 60% of voting rights, 60% of profit entitlement, 60% of winding-up assets. All four prongs are at more than 50%; the test is met.

The FA 2025 reforms: five operational changes from 6 April 2025

Finance Act 2025 s.31 and Schedule 6 commenced 6 April 2025 and made five material changes to the EOT relief framework. Disposals on or after that date must use the post-FA-2025 architecture; pre-6 April 2025 disposals continue under the older rules for their disqualifying-event periods.

UK-resident trustee requirement. The EOT trust must have UK-resident trustees throughout. The pre-FA-2025 practice of using offshore trustees (for CGT planning on the trustees' subsequent disposal, or for control flexibility) is closed for new EOT structures from 6 April 2025.

Trustee independence test. Restrictions on former-owner influence over the trustees post-disposal. Specific tests on related-party trustee appointments (former owners cannot be a majority of trustees, cannot control the trustees, cannot direct the trustees' discretionary decisions). The intention is to ensure the trust operates genuinely in the employees' interest rather than as a continuation of former-owner control.

Consideration tightening. The 'reasonable steps' obligation around price-setting is tightened. Purely deferred-consideration or earn-out structures that left former owners economically exposed to the company's post-disposal performance (effectively retaining ownership economics while transferring legal title) are restricted. The reform requires the consideration framework to reflect a genuine arm's-length disposal price rather than a vendor-financing dressed up as a sale.

Extended disqualifying-event period. The s.236O anti-avoidance window is extended beyond the pre-FA-2025 baseline. Disqualifying events (loss of trading status, loss of controlling interest, change in trustee independence) trigger claw-back over a longer post-disposal window. The exact period varies by event but is generally five years or more post-disposal under the new architecture.

ITEPA s.312A framework modifications. Schedule 6 Part 2 amends the bonus exemption framework. The £3,600 per-employer-per-tax-year ceiling remains in force at writing (the pending FA 2026 c. 11 uplift to £4,800 had not received Royal Assent at the writing date of this page); structural conditions around qualifying-bonus payment have been tightened.

ITEPA s.312A: the bonus exemption and the CTA s.464M to s.464Q myth

ITEPA 2003 s.312A provides the income-tax exemption for qualifying bonus payments by EOT-controlled trading companies. The verbatim wording at s.312A(1): 'No liability to income tax arises in respect of the qualifying bonus payments if, or to the extent that, the total chargeable amount in respect of those payments does not exceed £3,600.' The figure is per employer per tax year, not per employee. Conditions at ss.312B to 312I include all-employees-on-similar-terms participation, not paid in lieu of regular salary, and the bonus must be from an EOT-controlled trading company.

NIC still applies. The s.312A exemption is income-tax-only; Class 1 NIC applies to the bonus payment in full. The structural implication is that the £3,600 exemption produces an income-tax saving (at the employee's marginal rate, capped at the £3,600 amount) but the employer NIC and employee NIC continue. The net employee benefit on a £3,600 bonus is therefore the income-tax that would have applied on £3,600 at the marginal rate (between £400 for a basic-rate employee and £1,610 for an additional-rate employee), not the full £3,600.

The CTA 2010 ss.464M to 464Q range frequently cited in older practitioner content for the EOT bonus exemption does not exist. CTA 2010 ss.464A to 464D are the close-company loans-to-participators anti-avoidance code (with ss.464C and 464D omitted by Finance Act 2025 from 30 October 2024). There is no ss.464M to 464Q range in the live statute. Sessions writing on EOT bonuses must use the ITEPA s.312A onwards citation. The misconception is a long-running drift in commentary; our house-position lock at §22.20 explicitly forbids the wrong citation.

Disqualifying events under s.236O: what unwinds the relief

TCGA 1992 s.236O sets out the disqualifying events that trigger claw-back of the original s.236H relief if they occur in the disqualifying-event period. The principal categories: the company ceases to be a trading company; the EOT ceases to hold a controlling interest; the limited-participation requirement under s.236N is breached (former owners exceed the threshold of participation in the trust); the trustee independence test (post-FA-2025) fails; the trust becomes non-UK-resident.

Where a disqualifying event occurs, the relief is unwound and the original CGT becomes chargeable as if the s.236H relief had never applied. Interest runs from the original disposal date. Penalties may apply where the disqualifying event reflects deliberate or careless conduct. The structural implication for the founders' post-disposal planning is that the EOT exit is not a clean once-and-done transaction; it is a multi-year arrangement requiring ongoing compliance with the trading-company test, the controlling-interest test, the trustee independence requirement, and the limited-participation rule.

For the Patel-Properties case: the founders' 40% retained holding does not breach the s.236N limited-participation test because the limit applies to former owners' participation as beneficiaries of the trust, not to their direct shareholding outside the trust. The founders can continue to receive dividends on their retained 40% without affecting the EOT's compliance. The forward-looking risk register is around the company's trading status (does the property-management business remain trading, or does it drift into hybrid investment-and-trading?), the EOT's controlling interest (do subsequent share issues dilute below the more-than-50% threshold?), and the trustees' independence (do the trustees develop a track record of independent decision-making, or do they default to former-owner direction?). These need monitoring over the disqualifying-event period.

Comparison with MVL and other exit routes

EOT competes with MVL (members' voluntary liquidation) as a CGT-efficient exit route for owner-managed trading companies. MVL distributes the company's net assets to shareholders as capital under TCGA 1992 s.122; CGT applies at residential or non-residential rates with possible Business Asset Disposal Relief delivering 10% to 14% on the first £1m of qualifying gain. EOT defers CGT entirely (no-gain-no-loss treatment on the disposal to the trust). The strategic choice turns on three axes.

First, does the company continue (EOT) or close (MVL)? EOT requires the company to keep operating under EOT ownership; MVL winds it up. Founders who want the company to continue (employee succession, ongoing trading) choose EOT; founders who want a clean closure choose MVL.

Second, does BADR apply to the MVL distribution? BADR delivers 10% to 14% CGT on the first £1m of qualifying gain; for founders with eligible business assets, BADR reduces the MVL CGT cost substantially. If BADR is available and the gain is below £1m, MVL with BADR can be cheaper than EOT deferral (because the 10% / 14% rate compares favourably to the eventual full rate on the deferred EOT gain when the trustees subsequently dispose, assuming they do).

Third, does the founder want post-exit involvement? EOT requires founders to step back from control under the FA 2025 independence test; MVL terminates the company so founder involvement is moot. Founders who want to remain involved post-exit choose EOT (with careful navigation of the independence test); founders who want clean exit choose MVL.

For the Patel-Properties case, EOT was the chosen route because the founders wanted the management business to continue under employee ownership and to share value with the 14 long-tenure employees who had built the business. The CGT deferral was a useful byproduct rather than the primary motive. See our MVL mechanics page for the detail on the liquidation route and the BADR interaction; our SPV pillar page for the broader landlord-SPV exit-route landscape; and our trust-owned-SPV extraction rules page for the cash-extraction mechanics within trust ownership structures.

The Patel-Properties timeline: from pre-disposal preparation to disqualifying-event window expiry

The Patel-Properties EOT transaction spreads across roughly six years from initial scoping to disqualifying-event window expiry. The timeline below shows the year-by-year sequence with the operational requirements at each stage.

Year 0 (2025/26): scoping and preparation. Founders engage exit-planning advisers; trading-status analysis confirms property-management business qualifies under s.236I; share-class review confirms ordinary-shares structure supports the s.236M four-pronged test; trust deed drafted in line with the FA 2025 independence and limited-participation requirements; UK-resident trustee firm identified and appointed; valuation of the company conducted by independent valuer (typically £4m to £6m for a 280-unit management business depending on margin profile and contract stickiness); consideration structure designed (typically a mix of cash on completion plus deferred consideration over 5 to 7 years, with FA 2025-compliant safeguards on the deferred elements).

Year 1 (2026/27): completion. Founders transfer 60% of ordinary shares to the EOT trustees; consideration structure activates; founders retain 40% on the existing share-class architecture; trust deed lodged with HMRC where applicable; first-year operation under EOT ownership begins; bonus payments under ITEPA s.312A start (where the company chooses to use the exemption; many companies introduce the bonus structure in the year of EOT completion to mark the transition).

Years 1 to 5 (disqualifying-event window). The company must maintain trading status throughout; the EOT must maintain its controlling interest across all four s.236M prongs; trustees must operate independently of the former founders; limited-participation requirement under s.236N must be maintained (founders cannot become majority beneficiaries). The s.312A bonus exemption continues annually subject to compliance with the all-employees-on-similar-terms condition. Founders may receive dividends on their retained 40% holding throughout (and these are taxed in the usual way; no s.312A exemption applies to dividends because the exemption is bonus-specific).

Year 6 onwards: post-window operations. Once the disqualifying-event window closes, structural flexibility increases. The EOT can dispose of part of its controlling interest (subject to a continuing more-than-50% holding if further EOT relief is desired on subsequent transactions). The trustees may make capital distributions to employee beneficiaries within trust-side tax constraints. The founders may make further exits via gradual disposal of their 40% retained holding (subject to CGT in the usual way; BADR availability may be re-evaluated at that point if the conditions are met).

The retained-holding question for founders

Where founders retain a minority holding post-EOT-disposal (as in the Patel-Properties 60/40 case), the retained shares sit outside the s.236H no-gain-no-loss treatment and the founders' tax position on those shares follows the standard rules. Dividends received on the retained 40%: taxable as dividend income at the founders' personal rates (10.75% basic / 35.75% higher / 39.35% additional from 6 April 2026 per Finance Act 2026). Subsequent disposal of the retained shares: CGT at the founders' applicable rate at disposal, with possible BADR if the conditions are met (the BADR conditions require the founder to be an officer or employee of the company plus a personal-shareholding threshold; many former founders maintain an officer role post-EOT in non-controlling capacity, which preserves BADR availability for the retained holding).

For Patel-Properties: Asha and Diya each receive dividends on their respective 20% retained holdings throughout the post-disposal years. Annual dividends might run at £30,000 to £40,000 each depending on the company's distribution policy. Income tax on those dividends sits in their personal tax computations. At some future point, the sisters may dispose of part or all of their retained 40% (perhaps gifting some to children, perhaps selling to the EOT to extend the EOT's controlling interest, perhaps selling to a third-party buyer if the EOT is later wound up). Each disposal triggers a separate CGT analysis; the original s.236H relief on the 60% disposal does not carry over to the retained shares.

The structural implication for founders considering EOT exit is that the route delivers CGT deferral on the disposed portion (here 60%) but the retained portion (here 40%) sits outside the relief and remains subject to standard CGT on any subsequent disposal. Sessions advising founders should walk both halves of the structure together: the EOT-disposed shares and the retained shares, with their separate tax treatments, separate exit horizons, and separate planning considerations.