What is a 5% participator, and why does it matter for an EOT?

For EOT purposes, a 5% participator is someone who already owns 5% or more of the company’s shares, has the right to acquire 5% or more (for example through share options), or would be entitled to 5% or more of the assets on a winding up. Holding 5% or more of any single class of shares also counts.

Under the “limited participation requirement”, 5% participators who are directors or employees — plus any employees connected to them, such as spouses, children or other relatives — must not make up more than 40% of the total workforce. This is known as the participator fraction.

If the fraction goes above 40%, a selling shareholder with 5% or more may lose the Capital Gains Tax relief altogether. The rules most often catch very small businesses, businesses employing family members, and businesses with more than one share class.