Government launches consultation into Employee Ownership Trusts

Employee Ownership Trusts (“EOTs”) have been with us for almost 10 years. To mark this, the Government thinks it is time for a review. On 18 July 2023 the Government published its much anticipated consultation on the taxation of EOT and other Employee Benefit Trusts (“EBTs”) arrangements.

EOTs were introduced by the government in 2014. They were established 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.

The government is now consulting on a number of proposals that are intended to remove the perceived abuse of these rules, as well as giving clarification on how certain aspects of the EOT rules were intended to work.

What are the main proposals?

The consultation runs until 23 September and the main proposals are:

  1. Preventing the selling shareholders, or parties connected to them, from being the majority of the trustees of the EOT. This aims to try and ensure that there is meaningful change for the employees of the company.  Furthermore, there is the scope to set conditions which should be placed on the appointment of the trustees. For example requiring that the trustees include people from specific groups (for example, employees). 
  2. Requiring the trustees of an EOT to be a UK resident as a single body of persons.  The government will still allow non-UK residents to be appointed as trustees. However, the EOT would need to be UK resident as a single body of persons. This change is designed to prevent instances where non-resident EOTs were established, by appointing solely non-UK trustees, as part of an arrangement to wash future Capital Gains Tax liabilities.
  3. Reducing the number of clearance applications that advisers typically make as part of an EOT transaction.
  4. The ability of companies that are owned by EOTs to pay income tax-free bonuses of up to £3,600 per employee per year is subject to strict requirements.  The government is now proposing the relaxation of these requirements. This is in order to allow bonuses to be awarded to employees without necessarily having to be awarded to directors.  

We will be monitoring the progress and the outcome of this consultation closely. We will be reviewing the full report which is expected to be published later this year.  Additionally, as it is likely that those with existing Employee Ownership Trusts structures may need to take action in the future to make sure their structures are compliant, we can have those discussions before 6 April 2024.

Get in touch

For further advice on tax-efficient business transactions or sales, please get in touch with a member of our business tax team on 01903 234094.