Employee Ownership Trusts (EOTs) have seen a significant surge in the popularity in recent years, and this trend is expected to continue following the latest Budget announcements on 30 October 2024.
Introduced in 2014, the EOTs model offers several tax incentives to encourage business owners to transfer control to their employees, making it an appealing option for those looking to retire or exit their business while preserving company culture and securing employee interests.
The Budget reaffirms the government’s commitment to genuine employee ownership by maintaining tax incentives for businesses transitioning to EOTs. From 30 October 2024, new measures will address HMRC’s concerns regarding misuse of the EOT framework, particularly where transactions appear motivated primarily by tax advantages rather than a genuine focus on employee benefit and further support their use for their intended purpose. These changes also seek to simplify the sale process and offer support to professional advisors assisting businesses through the transition. Despite some speculation to the contrary the 100% CGT Relief remains, and there is no upper limit on the value of the shares.
Key Post-Budget Changes
Control: The view that EOTs are to genuinely represent employee control has been now made a requirement by the introductions of a new “Trustee Independence Requirement”. This means that the former owners (or connected persons) cannot directly or indirectly “control” or make up a majority the EOT trustee board post-sale to the EOT if EOT Relief is claimed, subject to a few exceptions. However, the rule changes do not prevent former owners being trustees, as many may wish to be.
Disqualifying events: The "seller clawback period" during which capital gains tax (CGT) relief can be revoked if conditions are breached after the disposal to the EOT, has been extended to four tax years. If a “disqualifying event” occurs within this period, the seller’s CGT relief will be revoked, and the seller will be liable for any CGT arising from the original disposal.
Valuations: EOT trustees must take “reasonable steps” to ensure the consideration paid for shares reflects fair market value and that any deferred payments have a commercially reasonable interest rate. If trustees fail to do so, the CGT relief will be lost, and contributions received by the trustees from the company will be treated as taxable distributions. While guidance on "reasonable steps" is still pending from HMRC, the objective is to implement a financially sustainable EOT structure that maintains fair pricing and protects employees' interest and avoids exploitation of tax or financial requirements. An independent valuation from an expert valuer is likely to be needed.
Funding: Legislation will be introduced in the Finance Bill 2024-25 to confirm the tax position of contributions made by a company to an EOT to fund the transaction. Whilst such contributions will be treated as distributions, relief will apply to amounts used to cover the trustees acquisition costs. These include the consideration payable to the seller shareholders and stamp duty due on the acquisition, and interest on deferred consideration, provided it doesn’t exceed a commercial rate. The changes will ensure that the contributions are not normally taxed in the hands of the trustees.
Residency: EOT trustees must be UK residents as a single body of persons (so that it is not possible to use an offshore trustee), at the time of disposal to the EOT and remain residents for rest of the tax year in which the disposal takes place. This requirement ensures the EOT trust adheres to the UK’s legal framework for CGT liabilities. If the trustees cease to be UK residents within the first four tax years following the disposal, the EOT CGT Relief will be revoked.
Bonuses: EOT-owned companies can still make income tax-free bonus payments of up to £3,600 to employees. For this tax relief to be available, all eligible employees, except those with less than 12 months of continuous service, must be eligible to participate. From 30 October 2024, directors can be excluded without breaching this full participation requirement. The government currently has no plans to raise the taxfree bonus amount.
Reporting Obligations: While this does not represent a major change, it is important to note that sellers must now include details of the sale proceeds and the number of employees at the time of disposal in their CGT relief claim for the 2024/5 tax year and onwards.
Laytons comments
EOTs offer a tax-efficient and employee-focused solution for business ownership transitions. With continued CGT relief and increasing support from advisors and government initiatives, EOTs are gaining traction across the UK. Additionally, high interest rates make EOTs a more compelling alternative to debt-heavy buyouts. While EOTs require careful planning, their growing accessibility makes them a viable option for many businesses. Following the Budget, EOTs remain a dynamic choice, supporting inclusive and resilient ownership models. As more businesses adopt this approach, sales to EOTs are expected to rise, reinforcing employee ownership’s role in the UK’s economic future. For more information on EOTs or Budget updates, please contact our team.
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Disclaimer: This publication is provided by Laytons LLP for informational purposes only. The information contained in this publication should not be construed as legal advice. Any questions or further information regarding the matters discussed in this publication can be directed to Laytons LLP and its Corporate team.