Autumn Budget 2024 –  Reforms to Employee Ownership Trusts (EOTs)

The changes provide greater clarity on the rules surrounding EOTs and put best practice into law with the aim of ensuring EOTs serve genuine employee purposes. We summarise below some of the key changes and our comments on each:

1. Prevent Control by Former Owners: A clarification on the principle that a seller must give up control of the company. This is achieved by the sellers (or connected individuals) making up less than 50% of the EOT trustees. A seller can remain active in the business of the trading company or group on a day-to-day basis as a director.
2. Trustee Requirements: Trustees of the EOT must be UK residents at the time of the sale. An inevitable change to ensure tax due to the revenue at a later date is not avoided by setting up an offshore trust. EMW has never established an EOT with offshore trustees.
3. Market Value Purchase: Trustees must actively ensure the purchase price paid for the company is no more than market value, achieved by ensuring the trustees have any valuation reports addressed to them as well as the sellers.
4. Extended HMRC Scrutiny: HMRC can withdraw capital gains tax relief up to the end of the fourth tax year following disposal if a disqualifying event, such as a further sale of the business, occurs. This marks a change from the previous position where the period expired at the end of the next tax year. Perhaps one which a seller may ponder, but a change that provides some protection to the trust (and employees) and should be accepted by sellers with a genuine desire to move the company into employee ownership.
5. Increased Disclosure: Selling shareholders must provide more information, including the number of employees and purchase price, in their CGT relief claim.
6. Fewer HMRC Clearances: Fewer clearance applications to HMRC are required for EOT transactions which reduces some of the complexity at the outset of an EOT transaction.
7. Income Tax-Free Bonuses: Amendments to rules concerning income-tax free bonuses for employees of EOT-owned companies. By way of reminder, if certain criteria are met, employees of EOT owned companies can receive up to £3,600 income tax free (such payments would still be subject to NIC). The government have changed the legislation so that bonuses will still qualify for income tax free treatment even if directors of companies are excluded from receiving the bonus.

Interestingly, there is no cap on the size of capital gains made by a seller on the sale of shares to an EOT that qualify for tax-free treatment; which was considered a possibility. We would not expect the changes to impact a seller’s decision to choose the establishment of an employee ownership trust as a succession option – from a tax and operational perspective it remains very much attractive. For other articles on EOT governance and establishing an EOT please see here.

If you would like to discuss the use of an employee ownership trust or exit planning generally, get in touch!