Hidden deep among the Budget talk on 30 October 2024, the Government published their long awaited response to the consultation on Employee Ownership Trusts (EOT). A way of providing benefits and ownership to employees, while providing relief from capital gains tax (CGT) for the seller, it's perhaps not surprising that publication came on the same day on which CGT rises were announced.
But what were the main changes?
- The extent to which the former owners can stay involved in the business is restricted. While they and their connected persons can be on the board of trustees - something respondents feared the Government would prohibit - they cannot make up the majority of trustees. They must also not be able to exercise control through the trust deed.
- The trustee must be a UK resident - this stops avoidance of CGT being affected through a sale to an offshore EOT who immediately or soon after sells to the true buyer.
- Confirmation that contributions made by the company to an EOT to pay the purchase price for the shares will not be subject to income tax as a distribution - this was already the practical position and will now be formally confirmed.
- The tax-free bonus offered to all employees can now exclude directors, to ease administration.
- Trustees must take all reasonable steps to ensure they do not pay in excess of market value for the business - this is to prevent former owners abusing the CGT relief by selling at an overvalue. In addition, the clawback period for reclaiming tax if a disqualifying event occurs has been extended to four years; and persons claiming relief must include information on the sale proceeds and number of employees of the company at the time of disposal.
- There have also been changes to Employee Benefit Trusts - namely restrictions on persons connected to participators in a close company benefiting from the capital of the trust for the lifetime of the trust, and making up less than 25% of employees who can benefit from the income of the trust. In addition, the inheritance tax exemption is only available where the settlor held the shares for two years before transferring into the trust.
The changes took effect on 30 October 2024 are designed to strengthen the original purpose of these trusts by encouraging transition to employee ownership while avoiding tax avoidance. Will there be more devils in the detail as the measures are legislated? We'll just have to find out!
For those wondering what happened to the Government response on all-employee share schemes… we all remain on tenterhooks (for now).
