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Autumn Budget 2024: Employee Ownership Trust Changes

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Whilst not subject to widespread use, Employee Ownership Trusts (EOTs) have been the subject of an industry wide consultation and many of the considered changes will be adopted. In addition, where previously anyone considering the use of such a structure would apply for HMRC advance clearance, the ability to do this will cease as of 31 October.

What was an EOT anyway?

An EOT is a trust which is set up for the benefit of the employees or office holders of a company or group of companies.  Since the introduction of the legislation in 2014, there are potentially significant tax breaks (0% capital gains tax) for owners of private company shares transferring a controlling shareholding into such a trust. In addition, the EOT can make tax free bonus payments of up to £3,600 to qualifying employees. It is generally thought that these arrangements, whereby trustees own company shares and exercise control of the company for the benefit of all the employees, is motivational and engaging for employees.

What are the changes?

Due to perceived abuse of the EOT framework and after much consultation with interested parties the following changes are proposed to the current rules:

  • Restriction of former owners, or persons connected with former owners, from retaining control of companies post-sale to an EOT by virtue of control (direct or indirect) of the EOT
  • Requirement that the trustees of an EOT must be UK resident and not offshore at the time of disposal to the EOT
  • Confirmation in legislation that contributions made by a company to an EOT to repay the former owners for their shares will not be charged to income tax as a distribution – a clarification of a technical ambiguity rather than a change in rules
  • An easing of the EOT income tax-free bonus provisions to allow bonuses to be awarded to employees without directors being included
  • Extension of the period of time within which the relief can be withdrawn from the former owner if the EOT conditions are breached post-disposal, to the end of the fourth tax year following the tax year of disposal – this was previously one or two years depending on the broken rule in point
  • Requirement that the trustees must take reasonable steps to ensure that the consideration paid to acquire the company shares does not exceed market value (an interesting point as trustees by their very nature are required to ensure they do so)
  • Requirement that individuals provide within their claim for Capital Gains Tax (CGT) relief information on the sale proceeds and the number of employees of the company at the time of disposal
  • Confirmation in legislation that the restrictions on connected persons benefiting from an EOT must apply for the lifetime of the trust
  • Only allowing the Inheritance Tax (IHT) exemption for EOTs where the shares have been held for two years prior to settlement into the EOT
  • 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

As the draft legislation is debated and edited through to a final version, some finer detail may become apparent.

Contact us

If you would like to discuss whether this impacts on your EOT or your deliberations as to whether or not to adopt such a structure, please contact Jacqui Gudgion or your usual Mercer & Hole contact.

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