Changes to EOT rules following the 2024 Autumn Budget

Between July and September 2023, a government consultation was held on the taxation of Employee Ownership Trusts (EOTs) and Employee Benefit Trusts (EBTs). This consultation aimed to review the favourable tax treatment of these trusts, particularly EOTs, which have grown enormously in popularity since their introduction in 2014.

Following this consultation and its findings, the government has announced several changes to the rules regarding EOTs, specifically the tax relief available to exiting shareholders when the right conditions are met.

Through these changes, the government wants to ensure that the EOT route continues to benefit those using it for its intended purposes while preventing it from being used inappropriately as a tax vehicle.

Please note that the following is not an exhaustive list of changes announced in October 2024. For more detailed information, please see the government’s full consultation paper.

Summary of EOT rule changes

Former owners cannot retain control post-sale

Effective immediately, for a sale to an EOT to qualify for relief, former company owners who have sold to an EOT will no longer be able to retain control of the EOT and, therefore, the company post-sale. They must also be unable to have control of the EOT via powers under the trust deed. This also extends to persons connected with former owners, such as spouses.

The former owner can remain on the board of trustees but cannot retain control. The consultation determined that allowing former owners to retain control can give the impression that no meaningful change has taken place regarding management. However, they acknowledge that the legal duties of trustees should mitigate this.

Trustees of an EOT must be UK resident (at the time of disposal)

The trustees of an EOT must be UK resident (as a single body of persons) for the disposal to qualify for relief. EOT status will be lost if this condition is breached at any time following disposal, and an exit charge will also be triggered.

The government says EOTs can still be established with a mix of UK and non-UK resident trustees as long as the settlor of the EOT was a UK resident at the time the EOT was set up.

Contributions into the EOT to pay former owners won’t be taxed

Following the consultation, the government has determined that contributions made by a company to an EOT to pay the former owner for their shares are a distribution. They will, therefore, introduce a new relief to ensure that income tax is not charged on these distributions.

Directors no longer need to be included in tax-free bonuses

The government has eased the rules relating to tax-free bonuses for employees, determining that these bonuses may be awarded to employees with directors excluded. This is intended to make the bonuses “easier to administer while increasing opportunities for lower-paid employees to benefit”.

They have, however, ruled out any immediate plans to increase the tax-free bonus amount.

Tax recovery period extended to four years

The government is extending the time period in which they can recover tax from former owners of companies sold to an EOT if the EOT rules are broken post-sale. This is also known as the ‘vendor clawback period’ and will now be extended to four years after the year of disposal.

This change aims to encourage the seller to make a long-term commitment and align with the EOT's goal of promoting stable employee ownership.

The share price paid by the EOT must not exceed market value

The consultation addressed concerns that some sellers may seek to take advantage of EOT rules to sell their shares to the trust at an inflated price greater than their fair market value. In order to qualify for relief, the government says trustees must ensure that the price paid for the shares does not exceed their fair market value at the time they are sold.

Additional information required to claim Capital Gains Tax relief

An individual who sells a controlling stake of a business to an EOT is now required to provide additional information to HMRC within their self-assessment tax return in order to claim relief from Capital Gains Tax. This information must include the following for claims relating to the 2024/25 tax year onwards:

• The consideration they have received for the shares
• The number of employees at the date of disposal

Our view

While the government is introducing new rules relating to Employee Ownership Trusts, business owners are encouraged to seek experienced EOT advice before implementing any transaction plans.

For the right business and owner, an EOT remains the most tax-efficient way to sell your business. However, that should not be seen as the sole benefit of this transaction type.

A qualifying EOT transaction guarantees the seller the full market value for their shares based on independent assessment. Unlike a trade sale, it provides certainty of exit in a defined time frame. It also means exiting the business with assurances that employees are looked after and that your legacy is secured.

There are many more benefits to an EOT transaction, which you can read about on our website.