Employee Ownership Trusts – where are we now post-Budget?

The UK government yesterday introduced reforms to the employee-ownership trust (EOT) regime. The EOT regime, established in 2014, allows EOTs to acquire a controlling stake in a company and offers capital gains tax relief (EOT Relief) to former owners selling their shares to an EOT. The reforms aim to support genuine employee ownership, prevent abuse, and bring welcome technical clarifications, with some going beyond those proposed during HMRC’s consultation on the EOT regime last year.

Key reforms include:

• A new requirement for trustees to ensure the consideration paid for company shares does not exceed market value.
• Restrictions being placed on former owners or connected persons retaining control of companies post-sale to an EOT. EOT Relief will not be available unless a majority of the trustees of an EOT consists of persons other than the former owners (or their connected persons) or companies under their control. These restrictions do not apply to EOTs established before 30 October 2024.
• Clarification that the funding of the EOT by companies for the payment of the initial and deferred consideration will not be taxed as distributions.
• A requirement for the trustees of the EOT to be UK tax resident, to ensure that future disposals of shares by the EOT remain within the UK tax net, with exceptions for EOTs established before 30 October 2024.
• The "monitoring window" for the technical conditions for EOT Relief to continue to be met has been extended from the end of the tax year following disposal to four tax years following the tax year of disposal to encourage long-term employee ownership.
• Flexibility has been added so that the £3,600 tax-free bonus can be paid to employees excluding directors.
• A new reporting requirement for former owners claiming EOT Relief, who will now need to include information on sale proceeds and the number of employees at the time of disposal in their self-assessment tax return for the 2024/25 tax year onwards.

Please see here for more information on the reforms.