What changes are being introduced for employee ownership trusts?

In its recent budget announcement, the new Labour Government increased the rates of Capital Gains Tax (CGT) in relation to the sale of shares but has maintained CGT relief for sales to employee ownership trusts (EOTs). This is good news for employees as well as business owners who will continue to benefit from tax-free sale proceeds provided they comply with the qualifying conditions.

However, a number of changes were announced in relation to EOTs with effect from 30 October 2024:

HMRC reporting requirements

Tax advisers for the selling shareholders are now required to include more information to claim CGT relief on the sale proceeds, including the number of employees of the target company at the time of disposal and the purchase price payable.

Control of EOT

Selling shareholders (and persons connected to them) are now prevented from directly or indirectly controlling the EOT. This will result in the appointment of more independent trustees and employee representatives to EOT trust boards.

EOT tax residency

The trustees of the EOT must now reside in the UK at the time of disposal, so no offshore trusts are permitted.

Market value

EOTs must take all reasonable steps to ensure that the purchase price paid for the target company is no more than market value; independent valuations are therefore recommended.

Tax treatment for EOT funding

The Government has confirmed that contributions made by the target company to the EOT in order to pay the selling shareholder for their shares will not be treated as distributions for tax purposes. This would include associated Stamp Duty and any interest payable at a reasonable commercial rate. This would only apply if the consideration paid by the trustees for the shares does not exceed the market value for those shares.

Extension of “vendor clawback period”

The Government has extended the period in which HMRC may withdraw CGT relief for the sale proceeds to the end of the fourth tax year following the end of the tax year of disposal of the target company if a “disqualifying event” takes place.

Tax-free bonuses

The Government has confirmed that tax-free bonuses of up to £3,600 per employee may now be awarded to all participating employees without directors being included.

The previous government consulted on many of these changes so they are not unexpected but it is important to take professional advice to avoid a disqualifying event which may lead to withdrawal of your CGT relief.

If you have questions about EOTs, please contact Andrew Bretherton.