The Autumn Budget – impact on employee ownership trusts

Chancellor Rachel Reeves set out her first Budget on Wednesday 30^th October. There was some speculation that the beneficial tax treatment of Employee Ownership Trusts (EOTs) could be reduced in the backwash of a general increase in Capital Gains Tax (CGT) rates. Although the 0% CGT rate for disposals to EOTs remains unchanged, there are a number of significant changes taking effect for EOT disposals on or after Budget day.

Seller Control

As predicted in last year’s EOT consultation report, restrictions are to be introduced to ensure that sellers do not control (directly or indirectly) the EOT.

In particular, a new trustee independence requirement has been introduced which will mean that only a minority of the EOT trustees can be former owners or persons connected with them.

UK residency requirement

Again, as predicted by the consultation, there is a new requirement that the trustees of an EOT must be UK resident. This has always been best practice in particular because it allows for UK employees to be represented on the trustee board.

Extended clawback

If you have sold your business to an EOT, previously if the trust decided to sell the business on, provided a full tax year has elapsed since the original sale, no clawback of CGT relief would apply to the original sellers.

Under the new rules announced today, the new clawback period is extended to four full tax years instead of one year.

Even after this period, EOT trustees will be liable for CGT on a sale but the original sellers will keep their relief.

Expert valuation

There is a new express requirement that the trustees of the EOT must take reasonable steps to ensure that the consideration paid to acquire the company’s shares does not exceed market value.

Again, this represents best practice, but we are aware of HMRC enquiring into EOT transactions where no expert valuation has been obtained or the valuation is not very resilient, which may put the sellers at risk of an income tax charge.

This new requirement clarifies the need to always obtain a formal valuation from an adviser with relevant expertise.

Claiming CGT relief

It has always been the case that sellers to an EOT need to claim the CGT relief on their individual tax returns. Up until now this has not been a particularly onerous requirement (mainly simply referring to the HMRC clearance letter).

However, any sale to an EOT from 6^th April 2024 imposes an additional requirement that the seller must provide in their tax return information on the sale proceeds and the number of employees of the company at the time of EOT disposal.

Contributions to the EOT

In line with current HMRC practice, legislation will be introduced to confirm the tax position of contributions made by a company to an EOT. In particular, the following items will not be subject to the Income Tax Distributions regime (i.e. not taxed as dividends). These include contributions in relation to:

• costs associated with setting up the EOT, including consideration payments to sellers in return for their shares,
• associated costs including stamp duty and
• interest paid to sellers at a reasonable commercial rate.

It should be noted that these do not make the contributions to the EOT tax deductible for the paying company.

Income Tax free Bonus

Clarification has been provided, so that directors do not have to receive an income tax free bonus and this does not prejudice the tax position of other recipients of the bonus.

Read the policy paper covering this on the Government website here.