Employee Ownership Trusts (EOTs) have been around since 2014, and have been a vital tool for business owners to consider succession planning. During May 2023, HMRC announced that they are consulting onto the effectiveness of EOTs, and will publish a report commenting on their effectiveness and whether any changes should be made to the existing regime.
We asked Connor Smith, Senior Tax Manager to share his insights, and outline the potential changes to EOTs and what action may be required.
Take it away Connor
As said above, EOTs although only being around for less than ten years, have proven to be a key part in helping businesses -partially due the generous tax breaks offered by them, but also due to them helping to strengthen employee engagement, retention and recruitment.
Below I have highlighted the current benefits and process of how EOTs operate, as well as running through the predicted changes that are currently being circulated, and when they will likely happen.
What are the existing benefits and how do EOTs work?
Although a fuller article on what an EOT is and the benefits of them is here, a brief summary of EOTs are that:
- Shareholders of a company can sell a controlling interest (51%) or more to an EOT and, in return, the shareholders are provided with a Capital Gains Tax (CGT) exemption such that no CGT is charged on the sale of shares. As an example, for a company with 2 shareholders selling a £5m interest in the company to an EOT, this can represent a tax saving of £800k.
- The EOT is run for the benefit of all staff.
- Employees can be paid tax-free bonuses of up to £3,600 per annum.
- EOTs can bring a number of commercial benefits to a company such as improved staff retention, easier recruitment, aligning employees and shareholders interests to maximise value of the company etc.
EOTs aren’t for everyone but they should at minimum be considered as an option when considering succession.
What changes will be made and when do we think they’ll happen?
The short answer is we don’t know. Although it feels unlikely that EOTs will be removed in entirety, it is more likely that restrictions will be placed on EOTs. This could result in:
- A cap being put on the CGT exemption – for example this could say proceeds up to £10m are CGT free but anything over and above this is taxable.
- A condition that, post transaction, a majority of directors of the company and trustees of the EOT cannot be the vendors – currently this is allowed.
- Anti-avoidance which prevents the EOT selling the shares in the company shortly after the EOT has been established.
In terms of timescale, the soonest that we’ll likely see changes, if any, will be the Autumn budget, which, historically, is the middle of October. Failing that, the next budget would be March 2024.
We are considering an EOT – what should we do?
To safeguard against the risk of a cap being put on the maximum tax-free proceeds, anyone interested in an EOT model should consider moving up their timescale.
At a push, EOTs can be completed in as quick as 6-8 weeks, therefore, there is still time left to implement before any potential changes, however, swift action will be required.
Here to help
If you’re considering whether an Employee Ownership Trust could be the right thing for you and would like to discuss your circumstances, along with the possible changes in more detail, get in touch with one of our specialist advisors who can help guide you through.