You may have missed it in the Budget, but at the same time as the speech was published, the Government also published their response to the consultation on employee ownership trusts.

This is not a surprise given the increase in Capital Gains Tax in the budget, which will make the employee ownership trust (EOT) even more potentially attractive to business owners.

 Key measures to be introduced include:

1. With effect from 30 October 2024, for a disposal of an EOT to qualify for relief, the majority of the trustees of the EOT must consist of persons other than the former owners or people/companies connected to them. It will also be impossible to give that de facto control via the trust deed. These restrictions will not apply to EOTs established before 30 October 2024 (though EOTs wanting to avoid HMRC scrutiny might be well advised to implement changes now). This was a proposal supported by the sector and we agree that this constitutes good practice.
2. The Government is not going to go further and mandate the composition of the trustee board (which we welcome).
3. The Government is requiring EOT trustees to be residents in the UK going forward; thus ending the practice of ‘off shore’ trustees and ensuring transparency. Again, the balance of the sector supported this change.
4. The Government are also ending the practice of applying to HMRC for clearance for EOTs going forward, making a technical alteration to the rules on distributions to allow for this.
5. EO businesses will be able to pay tax-free bonuses to employees without needing to pay directors as well. However, the Government have declined to extend this relief to co-operatives.
6. The Government has extended the period for which the vendor of shares can be responsible for any ‘tax clawback’ to the end of the fourth year following disposal. This is a significant extension and will force selling owners to take a longer view than currently.
7. The Government are also introducing a new obligation on trustees to ensure that the EOT does not pay more than market value for its shares. This will require a radical change in how EOT conversions are conducted, to enable the trustees to be satisfied on this point (and meet their new legal obligation). Selling owners will also have to disclose the number of employees, and the funds received for shares when they do their tax returns. This is all part of greater scrutiny by HMRC.

The Government notes, in conclusion, that ‘changes outlined above are intended to ensure that the reliefs remain focused on the policy objectives of rewarding employees and encouraging employee engagement.’ We agree.

Advisors and those considering EO will need to work out what good practice now looks like in light of the new rules.

For more information 

For more information on the consultation on employee ownership trusts, please contact me.