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The UK government has launched the previously announced consultation into the use and effectiveness of the EOT model in the UK, which is scheduled to conclude on 25 September 

The consultation will have the aim of ensuring reliefs are targeted at incentivising EOTs as an employee ownership business model whilst preventing the reliefs from being used for unintended tax planning. 

What you can expect

HMRC are consulting on the following areas in particular:

  • Trustee Issues: Should there be a limit on the number of trustees of an EOT who can be made up by former owners. They are proposing that former owners should not be in control of the EOT. 
  • Trustee Tax Residency: The consultation will look to try and close a potential tax avoidance loophole relating to EOTs located offshore, as there is a perception that offshore EOTs are being used to avoid CGT in some cases.
  • Issues with Funding: The consultation aims to set out in law that contributions paid into the EOT by the company will not be taxable, clearing up some uncertainty under the current rules.
  • Employee Bonuses: HMRC wishes to review the rules relating to tax free employee bonuses of up to £3,600 a year, potentially relaxing them to enable employers to target bonuses to employees and not necessarily Directors. 

The areas under consultation are generally welcomed and should result in less uncertainty regarding the EOT tax legislation.   

A consultation does not necessarily mean changes are guaranteed, and in any case, any changes that are announced as a result of the consultation will not come into play for a while. 

Whatever the outcome of this consultation, it remains essential that clients continue to consider their main drivers for implementing an EOT transaction, and ensure experienced advisers are engaged to deliver the project. 

EOT remains a tremendous opportunity for companies which are suitable

An EOT is highly beneficial to companies for which it is a suitable route, and these benefits stretch far beyond tax incentives for the exiting shareholders. 

For employees, an EOT provides a real sense of ownership, as well as a tangible stake in the long-term success of the company. This not only improves employee retention but also helps recruit the best new industry talent. Employees can also currently benefit from tax-free annual bonuses of up to £3,600 subject to qualifying criteria. 

Employee-owned businesses are proven to be more resilient to economic downturns, with employees more motivated, happier, more loyal, and ultimately more productive. 

There are also several benefits to the seller besides the CGT incentive, including certainty of exit in a defined time frame, and a guarantee that they will receive the full market value for their shares, subject to independent valuation. 

Furthermore, sellers can have greater control over succession planning, meaning they can leave the business with assurances that employees are being looked after and that jobs are safeguarded following the transaction. They even get the option to move away more gradually, further reducing any potential turbulence caused by a sudden change in ownership.

Why it is essential to seek advice

While there is currently an effective 0% CGT charge for sellers who dispose of their shares to an EOT, this should not be the main objective of adopting the EOT model, and ultimately the transaction must be right for the Company and the employees. 

Beyond the benefits, however, it is also important to understand that the transition can be complex. An EOT will not be the best solution for every business, and potential issues may be overlooked if the departing shareholders don’t seek proper advice to help them understand the full picture. 

Employee Ownership Trusts continue to present a fantastic long-term opportunity for UK businesses and their employees, and the government remains highly supportive of their adoption by businesses doing so for the right reasons. 

The first step in understanding whether an EOT is right for a business is to seek qualified advice from both Corporate Finance and tax specialists, and a legal professional. 


Andy Ryder

Andy leads the award-winning Shorts Corporate Finance team.

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