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As a quick recap, an EOT is a particular type of employee benefit trust which enables a company to become owned by its employees. EOTs have been a very useful tool for company owners to facilitate an exit and/or as part of a succession planning strategy. The Autumn Budget included the UK Government’s response to the consultation it had been running in relation to EOT’s and Employee Benefit Trusts. The outcome of that consultation is positive news for advisers and clients alike.
What is new?
- Sellers and those connected with them can no longer retain control (either directly or indirectly) of a company post-sale to an EOT. This includes ensuring that the powers set out in the trust deed do not enable such control (i.e. control via the EOT).
- For the disposal of the company to an EOT to qualify for relief, the trustees of an EOT must be UK resident (as a single body of persons) at the time of disposal to the EOT and at any time following the disposal.
- Recognition in the legislation that contributions made by a company to an EOT to enable it to repay the former owners for their shares will not be charged to income tax as a distribution.
- As part of the tax incentives designed to encourage the formation of EOTs, an employee-owned company can pay up to £3,600 annually as a tax-free bonus to all its employees (including directors). The change is to ease the EOT income tax-free bonus provisions to allow bonuses to be awarded to employees without directors being included.
- The period of time within which tax can be recovered from the sellers if the EOT conditions are breached post-sale will be extended from 12 months to the end of the fourth tax year following the tax year of disposal.
- For a disposal to qualify for relief, the trustees must take reasonable steps to ensure that the consideration paid to acquire the company shares does not exceed market value.
- Former owners will be required to provide within their claim for Capital Gains Tax (CGT) relief information on the sale proceeds and the number of employees of the company at the time of disposal (for claims relating to the 2024/25 tax years onwards).
All these changes are effective from 30 October 2024 although legislation is still to be forthcoming.
The changes are all structural in nature, representing a tightening of perceived abuses (such as large or overinflated valuations) and an attempt to encourage patient capital and succession.
Attractive Tax Relief
Importantly, none of these changes impact the tax relief which makes EOT’s so attractive as a planning and succession tool. These are very advantageous and include the following:
- The sale of a controlling interest in the company is entirely free from capital gains tax. In light of the increase to the CGT rates of 18% (from 10%) and 24% (from 20%) this represents a significant benefit.
- Bonuses paid to an employee of a company owned by an EOT are exempt from income tax (but not national insurance) up to £3,600 per employee per year
- The sale of shares in a company by an individual to an EOT is an exempt transfer for inheritance tax purposes. In addition, an EOT is exempt from the ten-yearly charge and exit charges on distributions.
Should you consider an EOT?
EOT’s are not the right solution for every business. There is a weighing up of factors to be made between how quickly the sellers want to exit; the stability of the company and its long-term forecast profitability; and whether employees are motivated enough to align their interests with those of the sellers to run a successful company.
If you want to discuss an EOT to see if it is right for your circumstances, please get in touch with us. We can:
- Advise on transitioning to an EOT including any pre-transaction structuring;
- Review EOT transaction documentation on behalf of interested parties to the transaction.
Should you wish to discuss any of the issues raised in this article, please contact Cathy Bryant or Anthony Reeves.
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