Many business owners are now turning to Employee Ownership Trusts (EOTs) as a more attractive exit strategy. Since their introduction in 2014, EOTs have offered appealing tax benefits, including a 0% capital gains tax for owners transferring a controlling stake. This advantage is even more pronounced following yesterday’s budget, which raised Capital Gains Tax (CGT) from 10% to 18% for the lower rate (an 80% increase) and from 20% to 24% for the higher rate.
However, several important changes were introduced, aligning with our approach to employee ownership sales. These include conducting thorough valuations with affordability in mind, ensuring the professional trustee receives proper advice, and involving them early in the process. In response to perceived abuses of the EOT framework, industry consultations have led to proposed adjustments to HMRC’s rules, including:
- Restriction on Former Owners’ Control: Former owners or connected individuals cannot retain control of the company post-sale through direct or indirect control of the EOT.
- Residency Requirement for Trustees: EOT trustees must be UK residents at the time of disposal to the trust.
- Income Tax on Repayments: Legislation will confirm that company contributions to an EOT for share buybacks from former owners are not considered taxable distributions, clarifying a technical ambiguity. This has been an assumption till now.
- Adjustment to Tax-Free Bonus Rules: Employee Ownership Trusts can now issue tax-free bonuses to employees without needing to include directors.
- Extension of Relief Clawback Period: The period for relief withdrawal, if EOT conditions are breached post-disposal, will extend to the end of the fourth tax year following the disposal.
- Market Value Compliance for Share Acquisition: Trustees must ensure that share acquisition prices do not exceed market value, aligning with trustees’ inherent duties.
- Capital Gains Tax Relief Information Requirements: Claims for CGT relief must now include information on sale proceeds and the company’s employee count at the disposal time.
- Lifetime Restrictions for Connected Persons: The prohibition on benefits to connected persons will now apply for the lifetime of the trust.
- Inheritance Tax (IHT) Exemption Conditions: IHT exemption for Employee Ownership Trusts will only apply if shares have been held for at least two years before settlement into the trust.
- Employee Income Payment Restrictions: No more than 25% of employees eligible for income from the EOT may be connected to the company’s participators.
As the draft legislation progresses, further details may emerge, but overall, these updates seem to be very welcome and healthy steps toward reducing abuse. They aim to ensure that, while the tax break remains highly favourable (for now!), sellers and their advisors are aligning employee ownership with businesses in a way that promotes purposeful capitalism. This approach emphasizes a broader contribution to the economy, rather than simply capitalising on tax breaks.
Contact us about Employee Ownership Trusts (EOT)
If you would like more information about our Employee Ownership Trust service offering or recent case studies, please browse our website, Alternatively, if you would be interested in a free consultation with one of AVEOT’s experienced advisors, please call us at +44 (0)1737 240888 or submit the form on our Contact Us page.
