Employee ownership trusts (EOTs) have been around since 2014, but given the increased capital gains tax business owners will now face if they sell a business asset, thanks to Chancellor Rachel Reeves’ first Budget, they are likely to be of renewed interest as an option in organisation succession planning.
EOTs enable owners to sell their shares to employees via a trust, normally for full market value and financed in part from future profits. This disposal does not incur income tax, capital gains tax or inheritance tax liabilities, which is an advantage over other sales such as a private equity deal.
Additionally, the government’s recent announcement of a reforms package to the EOT regime means that the process of converting to one is clearer and more streamlined than ever before. These reforms ensure EOT sales are genuinely focused on promoting employee ownership and rewarding staff. They provide employers with greater flexibility to tailor the scheme and make bonuses more efficient to administer.
The government will also introduce legislation confirming that gifts made to the trustees of a trust, usually directly from the business, to fund the purchase price paid by the EOT and other costs, are not distributions and are free of income tax. As a result, HM Revenue and Customs (HMRC) no longer needs to provide clearance to organisations, thus reducing the cost and increase the speed of setting one up.
In addition, restrictions have been placed on former owners’ ability to control the EOT. The majority of the trustees must now consist of persons other than the former owners, persons connected with the former owners, organisations under the control of the former owners or connected persons, or organisations where half or more of the directors are former owners or connected persons.
All trustees now have a duty to take reasonable steps to ensure that the consideration paid to acquire the shares does not exceed the fair market value at the date of disposal. These, and other reforms, close down a couple of loopholes, provide useful clarification and help to streamline the EOT regime. They also help to ensure EOTs stay true to their intended purpose of putting employees at the heart of and in control of a business.
With the hike in capital gains tax rates, and the growing social importance of giving employees an active stake in their employers, EOTs are an increasingly tax attractive option and more employers may consider this route in future.
Matt Spencer is a tax partner and Caitlin Comins is a trainee at Kingsley Napley
