Employee ownership trust tax rules under review
The government is planning to overhaul the tax rules on employee ownership trusts to make it harder to use the schemes to avoid tax
Sara White, Editor, Accountancy Daily
The latest consultation sets out proposals to ensure that the tax regimes for employee benefits trusts (EBTs) and employee ownership trusts (EOTs) reward employees and encourage employee ownership, rather than opening up opportunities for abuse of the tax advantages.
It will prevent the original business owners from dominating the board of trustees after a sale and will stop overseas trusts from owning these employee owned companies outright, which gave overseas investors a generous tax break.
An employee ownership trust is a specific type of EBT whereby the trustees own the company, and exercise control of the company for the benefit of all the employees. They have preferential tax treatment through tax reliefs which were introduced in 2014.
Relief from income tax is available on qualifying bonuses of up to £3,600 per year per employee of the EOT-owned company. A qualifying bonus is a payment other than regular salary or wages that is paid to all employees on equal terms. There is no inheritance tax charge on the transfer of shares to an EOT.
The government wants to tighten up the ownership rules and is considering whether to restrict former owners from appointing themselves (or their associates) as the sole or majority trustees of the EOT, allowing them to effectively retain control of the company through their control of the trustee board.
This would be achieved by requiring that more than half of the trustees of the EOT be persons who are not the former owners or persons connected to them.
There also concerns that some trusts are based offshore and can avoid tax as a result. The government plans to introduce a requirement that the trustees of an EOT be ‘UK resident as a single body of persons’. This would require that either the trustees of the EOT all be UK resident; or that the trustees be a mix of UK resident and non-UK resident and that the former owner was UK resident or domiciled at the date the shares were disposed of to the EOT.
A breach of this condition at any time after the disposal such that a UK-resident EOT becomes non-UK resident would result in a capital gains tax exit charge.
Another proposal would amend the qualifying bonus payment rules so that tax-free bonuses can be awarded to employees without directors necessarily also having to be included. These changes would make the tax-free bonus, a key incentive for the setting up of EOTs, easier to administer, and in turn make EOTs more attractive as a whole.
The proposed changes could have unintended consequences with the opportunities for a sale to an employee ownership trust becoming more restricted for business owners.
Chris Blundell, partner at MHA, said: ‘HMRC is proposing changes to the currently very popular and tax-effective tax regime on employee ownership trusts (EOTs). EOTs mean owners don’t have to pay capital gains tax if they sell at least 50% of the business into an EOT which has the company’s employees as its beneficiaries.
‘The changes are intended to tighten up the regime to ensure the relief on EOTs does more to encourage employee ownership rather than allow the owners to avoid capital gains tax. We should be planning for these changes to come into effect as soon as the government can manage, so probably 6 April 2024.
‘The changes make sense and are reasonable but they could make a sale to an EOT more restricted for some owners making it more difficult for them to influence the company after the sale to an EOT.
‘From a tax perspective, the proposed prohibition on allowing EOTs to have non-UK resident trustees may well make the employees of the company worse off in the future were the EOT to sell its company shares in the years to come.
‘Anyone who has been planning to sell their company to an EOT should therefore be planning on doing this sooner rather than later.
‘You should certainly be aiming to get the sale to the EOT completed by March next year if you want to take advantage of the current regime, particularly if you were considering using offshore trustees for the EOT.’
The consultation will close for comment on 25 September 2023.