Taxation of Employee Ownership Trusts (EOTs) and Employee Benefit Trusts (EBTs)

The measure

In summer 2023, the then government launched a consultation seeking views on targeted proposals to ensure that the tax regimes relating to EOTs and EBTs remain focused on the objectives of rewarding employees and encouraging employee engagement. Following this consultation, the government has today announced a package of reforms.  

Changes specific to EOTs: 

• To restrict former owners or persons connected with former owners from retaining control of companies post-sale to an EOT by virtue of control (direct or indirect) of the EOT;
• To require that the trustees of an EOT must be UK resident (as a single body of persons) at the time of disposal to the EOT;
• To confirm in legislation that contributions made by a company to an EOT to repay the former owners for their shares will not be charged to income tax as a distribution;
• To ease the EOT income tax-free bonus provisions to allow bonuses to be awarded to employees without directors being included;
• To extend the period of time within which the capital gains tax (CGT) relief can be withdrawn from the former owner if the EOT conditions are breached post-disposal, to the end of the fourth tax year following the tax year of disposal; 
• To require that the trustees must take reasonable steps to ensure that the consideration paid to acquire the company shares does not exceed market value; and
• To require that individuals provide within their claim for CGT relief information on the sale proceeds and the number of employees of the company at the time of disposal. 

Broader changes applicable to EBTs: 

• To confirm in legislation that the restrictions on connected persons benefiting from an EBT must apply for the lifetime of the trust;
• To only allow the inheritance tax (IHT) exemption for gifts by individuals to EBTs where the shares have been held for two years prior to settlement into the EBT; and 
• To require that no more than 25% of employees who are able to receive income payments from an EBT should be connected to the “participators” of the company (broadly, 5%+ shareholders). 

In addition to these legislative changes, in line with wider HMRC practice on anti-avoidance motive tests, HMRC will cease from today to provide clearances to companies on the application of section 464A Corporation Tax Act 2010 (close company conferring benefits on participators) to a transaction to establish an EOT. 

Who will be affected?

Companies that are owned by EOTs, companies that have otherwise established EBTs and trustees of such EOTs and EBTs. 

When will the measure come into effect?

Generally, the changes will apply from 30 October 2024. Legislation will be introduced in Finance Bill 2024 to implement the changes.