Employee Ownership Trusts (EOTs) gained significant attention in 2024, and with increased popularity comes closer scrutiny.
October’s budget introduced new requirements and potential challenges for companies looking to implement EOTs, making it crucial to understand these changes and their implications.
WHAT ARE EOTs?
EOTs create a form of indirect employee share ownership by transferring company shares from existing shareholders into a legal trust for the long-term benefit of employees.
This structure provides employees with an equitable ownership stake while the trust mechanism offers a balance between direct and indirect ownership.
To encourage the use of EOTs, past governments introduced various tax benefits including exemptions from capital gains tax (CGT) and inheritance tax for disposals into the trust, as well as corporate tax deductions for employee bonuses.
KEY BUDGET CHANGES
The changes introduced in the 2024 Budget were partly expected, reflecting outcomes from last year’s consultation on EOTs, in which DWF participated.
First, the introduction of a new ‘trustee independence requirement’ prevents former owners or connected persons from controlling the EOT post-sale.
Trust boards should review their composition and plan for events like resignations or deaths, which could trigger a ‘disqualification event’, potentially jeopardising the EOT’s status.
Additionally, trustees of an EOT must now be UK residents at the time of the disposal to the EOT.
As with other aspects of the Budget, other changes introduced to Employee Owner Trusts were not so readily foreseen.
One such change allows the tax free bonuses of up to £3,600 available under the EOT framework to be awarded to employees but not to directors, which could impact how businesses plan their bonus structures.
Additionally, the clawback period for CGT liability on disqualifying events has been extended from one to four years.
This means that if a disqualifying event occurs within four years of the sale, the original seller may be liable for any resulting tax liabilities.
For sellers this could cause issues as they cannot control the business or the EOT after the sale.
It is also now a requirement for trustees to take ‘reasonable steps’ to ensure that the consideration paid to acquire the shares does not exceed their fair market value.
Failure to comply could disqualify the disposal from tax relief and expose trustees to tax on company distributions.
Furthermore, for EOTs purchasing shares on a deferred payment basis, interest rates must be commercially reasonable to prevent potential manipulation of financial or tax outcomes.
While the updates introduced by the 2024 Labour Budget certainly give business owners issues to consider and take professional advice on, they also reinforce the value of EOTs as genuine employee ownership vehicles.
Business owners considering an EOT should seek professional advice to navigate these changes effectively and avoid pitfalls.
James Morrison is a partner in DWF’s corporate team in Belfast. Additional research by Ellen Walsh, a trainee solicitor with DWF.
