Employee Ownership Trusts Budget changes

Although it didn’t get any coverage in the Chancellor’s Budget speech, Employee Ownership Trusts (“EOTs”) did experience some changes.

What are Employee Ownership Trusts?

EOTs were introduced by the government in 2014 as a way of encouraging indirect employee ownership of trading companies by providing a number of specific tax reliefs.

Perhaps the most talked about tax advantage is the ability for individuals to sell shares in trading companies or groups to EOTs, free of Capital Gains Tax (CGT).

Many of the changes in the Chancellor’s Budget are simply implementing rules which tighten up areas of potential abuse. These were highlighted during the consultation process carried out by the previous Conservative Government (copying their homework so to speak!)

What’s changed

Many of these changes are welcome. They give clarity on some areas which were perhaps slightly ambiguous, where as others could be seen as leading to more uncertainty for the exiting shareholders.

These changes are effective from 30 October 2024 for disposals taking place after this date and are as follows:

  • Restrict former owners or persons connected with former owners from retaining control of the company post-sale to an EOT by virtue of control (direct or indirect) of the EOT. Former shareholders that are trustees need to be outnumbered by other unconnected individuals;
  • Trustees of an EOT must be UK resident (as a single body of persons) at the time of disposal to the EOT;
  • Trustees must take reasonable steps to ensure that the consideration paid to acquire the company’s shares does not exceed market value. This makes a professional valuation more important to help protect their position;
  • Extending the ‘vendor clawback period’, (within which the tax relieved can be recovered from the vendor in the event of a disqualifying event post-sale), to the end of the fourth tax year following the tax year of disposal compared to one tax year it was previously;
  • Require that individuals provide, within their claim for Capital Gains Tax relief, information on the sale proceeds and the number of employees of the company at the time of disposal;
  • Confirmation that contributions made to the EOT to cover costs and the sale consideration is not a distribution for income tax purposes.

The increase in the vendor clawback period from one tax year to four may make some sellers hesitant, especially if they are not intending to have much involvement in the business post sale.

We would call for clarification on whether interest charges apply when the relief is removed. Based on the current legislation, that could be sizeable if accrued for almost four years. This is especially true when the Chancellor said they would be increasing the rate for late payment of tax.

Budget Hub

For more information on updates from the Budget, and our latest reactions, visit our dedicated Budget Hub.

For further guidance on Employee Ownership Trusts, please do not hesitate to contact our team on 01903 234094.