The Autumn Budget and Employee Ownership: What Could Change?

If you’re thinking of becoming employee owned through an EOT, you may want to complete the sale before 30 October to be sure of the current 0% CGT exemption.

With 30 October now the confirmed date for the new Chancellor, Rachel Reeves’ first budget, could there be tax changes that might impact employee ownership trusts (EOTs) and tax-advantaged personal share schemes? Founder and Manging Director, Robert Postlethwaite discusses the various possible scenarios and the implications for employee ownership.

Predicting the future

While nothing is ever certain or even likely when predicting future tax changes, there are clearly some red flashing lights.  For “we won’t raise taxes on working people” read “we won’t be focussing on income tax or National Insurance, but all bets are off on capital gains tax and inheritance tax”.

 So what tax changes might be made that could affect employee ownership, how might they play out and can anyone who might be affected do anything to protect themselves? 

In terms of impact, our main focus should be on capital gains tax (CGT).  There are longstanding exemptions from inheritance tax where this could otherwise apply to employee ownership and it feels unlikely that these would be changed.

It feels likely that the Chancellor is considering how to increase the tax raised from CGT and this could include more closely, or fully, aligning CGT rates with income tax (CGT is currently paid on shares at 10% or 20%, whereas income tax rates are up to 45%).  She may also look at business assets disposal relief (BADR), which is how a rate of 10% CGT can often be achieved on selling shares in private companies, rather than the headline 20% rate (BADR applies to the first £1m of an individual’s gains).

Let’s look at a no holding back scenario in which an individual becomes subject to CGT on gains at their income tax rate and BADR is removed. 

What would be the impact on sales to employee ownership trusts and personal share schemes?

EOTS

Looking first at EOTs, without other tax changes, the impact would be to make it significantly more attractive than it currently is for a company owner to sell to an EOT, selling at 0% tax instead of up to 45%.

So it is possible to imagine that if CGT rates were to increase, the EOT relief might be adjusted, for example by placing a limit on the amount of exempt gains per individual or replacing the 0% rate with a higher rate that was still lower compared with other sales.

Where BADR remained available in its current form, this would maintain a 10% rate on the first £1m of gains.  Individuals looking at larger gains would, under a full alignment of rates, pay more CGT on the rest.

Any company owner wishing to be certain of benefitting from the current 0% rate may therefore wish to consider the feasibility of selling their company to an EOT before 30 October.

Personal share schemes

For tax-advantaged personal share schemes (EMI, CSOP and SAYE options and the Share Incentive Plan or SIP), any alignment of CGT and income tax rates is likely to impact on any share sales taking place after the change is made.  If this were to happen, the only way to secure tax at current rates would be to sell before 30 October.

All the above assumes that changes won’t be made retrospectively.  Retrospective changes to tax rules are the exception in the UK, and seems unlikely.

What is possible though is that on 30 October the Chancellor announces plans to change the rules but they do not immediately come into effect.

In that scenario, we could expect “anti-forestalling rules” to be brought in which would apply to any proposed new tax rates or rules to share disposals made between 30 October and the date when they formally took effect.

Whilst we wait…

So all we can do for now is hypothesise and speculate on what changes might happen to employee ownership trusts and share schemes once the budget announcement is made, so for now if you are already thinking of transitioning to an EOT model, my advice would be not to delay!