The Employee Ownership Trust (EOT) was not mentioned in the Chancellor’s Budget Speech on Wednesday 30th March. However, the Finance Bill contains a number of measures that will impact on EOT transactions. These reflect the responses to the 2023 consultation and are largely positive in reinforcing the original intention of the EOT as a means to promote long term, employee-centred ownership of the company.
The headline news is that there is no change to the tax treatment of EOTs. A seller will not pay any Capital Gains Tax (CGT) on the sale of a business to an Employee Ownership Trust. Given the announced increases in CGT, this is likely to increase the attractiveness of the EOT as a succession option. This makes it even more important that measures are in place to ensure that an implementation of an EOT is motivated by the right reasons.
The key changes take immediate effect for transactions completing after 30th October 2024 and will not be retrospective. There is no impact on EOTs that have completed prior to this date.
The amendments can be summarised as follows:
- Ownership and Control Restrictions: Former owners or those connected to them are now restricted from retaining control over companies post-sale to an EOT. This aims to reinforce the principle that EOTs should genuinely benefit employees rather than be manipulated to provide a continued profit or influence channel for previous owners.
- Residency Requirements for Trustees: Trustees of EOTs are now required to be UK-resident at the time of sale. This measure prevents offshore arrangements that could complicate oversight and tax compliance, aligning with broader efforts to ensure UK-based governance for EOTs.
- Clarification on Tax Treatment of Payments: Payments made by companies to EOTs to reimburse former owners will not be treated as income distributions, clarifying an area of prior ambiguity. This supports smoother transitions of ownership without the risk of unexpected tax burdens on owners and removes the need to confirm with a non-statutory clearance application.
- Extension of Compliance Periods: The compliance period for owners receiving tax relief has been extended to four years. Should a disqualifying event occur (for example, a sale of the company) during this period, then the sellers will be required to repay the exempted tax. This lengthened period allows HMRC to monitor and ensure adherence to EOT rules, thereby safeguarding the framework from potential violations over a longer term.
- Fair Market Value Requirement: Trustees are now required to ensure the purchase price for shares does not exceed market value. This stipulation reinforces fiduciary duties of trustees and protects EOTs from overpaying, which could ultimately impact employee beneficiaries.
- Statutory Clearance Application: Requirement that individuals provide within their claim CGT relief information on the sale proceeds and the number of employees of the company at the time of disposal.
- Distributions from the Trust: Requirement that no more than 25% of employees who are able to receive income payments from an EOT should be connected to the participators of the company
- Tax Free Bonuses: Directors can be excluded from bonus payments without contravening the Equality requirement.
These changes are welcomed as a means to collectively enhance the integrity of the EOT model, ensuring that the EOT remains focused on employee benefit rather than tax avoidance strategies.
It’s good to see that the new government has acted on the responses to the 2023 consultation. Many of us who took time to submit responses feared that it had been a futile exercise. We can hope that there will now be a renewed interest in the EOT as a structure that promotes better business and good governance and perhaps more interest and support for the flourishing employee ownership sector.
