Autumn Budget 2024. Legislation tweaks to Employee Ownership Trusts and Employee Benefit Trusts

Changes were announced to employee ownership trusts and employee benefit trusts

What is an Employee Ownership Trust?

An Employee Ownership Trust, or EOT, is a trust set up to take control of a company where the beneficiaries of the trust are the employees of the company.

EOTs were brought in by the Government as an initiative to encourage employee ownership by giving business owners the opportunity to sell their shares to an employee-owned trust free from capital gains tax. The company is not then directly owned by the employees but rather a controlling ownership is transferred to an all-employee trust which is then held on benefit for those employees.

EOTs are a valuable tool for succession planning and incentivising and retaining staff in a market where skilled resources are limited. It provides a tax efficient exit for shareholders, by allowing a tax free disposal. With Business Asset Disposal Relief that currently gives a 10% capital gains tax rate for business owners making disposals, being phased out, EOTs are expected to be even more important for exit planning.

Any budget changes to EOTs?

The important thing is that EOTs were retained and not scrapped in the budget, so they remain a valid succession planning tool.

A consultation was undertaken by the Government on EOTs and a number of proposals were considered, all of which have been accepted, which were:-

• Restrictions on the control by the former owners
• Confirming trustees are required to be UK resident
• Legislation to confirm payments to EOT to pay former owners are not distributions
• Allowing bonuses for employees excluding directors
• Extending withdrawal period to end of 4^th tax year following the tax year of disposal
• Trustees required to ensure consideration for acquisition is not more than market value
• Individuals claiming relief from CGT required to provide information on sale proceeds and number of employees

What is an Employee Benefit Trust?

An Employee Benefit Trust (EBT) is a term used to describe a number of different sorts of trusts, usually discretionary trusts that are set up by an employer to use in a scheme to reward and motivate employees.

The benefits may be pensions, sick pay, a share of profits, shares or almost anything the employer might choose to include. There are inheritance tax reliefs available when using these. An EOT is a type of EBT.

Any budget changes for EBTs?

The consultation mentioned above for EOTs also included two additional points for EBTs that were considered and accepted, which were:-

• Restriction on connected persons benefitting from the EBT for the lifetime of the trust
• IHT exemption only where shares were held for 2 years prior to settlement in the EBT

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