What is an EOT?
An EOT is a trust whereby the Trustee owns and controls a company for the benefit of all of the employees. Since 2014, EOTs have benefitted from various tax reliefs including potential capital gains tax relief for the seller(s) on a disposal of shares to an EOT.
As part of a sale of a company to an EOT, the seller(s) sell a majority of their shares to the EOT. It is common for part of the purchase price to be paid by the EOT to the seller(s) on completion of the transaction, with the profits of the trading company being used to pay the balance of the consideration owed by the EOT to the seller(s) on a deferred basis.
Key government proposals
The government are concerned to ensure that the tax advantages which may be obtained by disposing of shares via the EOT route are only obtained where the policy objectives underlining those reliefs, namely encouraging employee ownership and rewarding employees, have been satisfied, thereby seeking to prevent exploitation of tax relief where this is being used for “unintended tax planning”.
Some of the key government proposals forming part of the consultation are as follows:
Preventing former owners from retaining control of the EOT by making changes to the trustee board composition
Often the seller(s)/former owner(s) of the company will retain involvement in the company post-sale and may even still have control of the company. Whilst the government acknowledges the advantages associated with this by virtue of the company benefitting from the former owners’ experience and in-depth knowledge of the company, the government has noted how such board composition may prevent meaningful change being delivered for the employees of the company.
The government has therefore proposed that a majority of the directors of the trustee company must be persons who are not the former owners or persons connected to them, with any breach of these conditions after disposal being a disqualifying event which could lead to an immediate capital gains tax charge to the trustees or the former owner.
Trustee residency
Under the current legislation, there are no conditions regarding the residency status of EOT trustees. The government is proposing that the EOT trustees (as a single body of persons) must be UK resident in order for the sellers to qualify for the capital gains tax relief. This would prevent the trustees being an offshore trust company.
Increasing flexibility relating to the tax-free employee bonus
At present, subject to certain criteria, an EOT can pay up to £3,600 annually as a tax-free bonus to its employees. The government is proposing to amend the qualifying bonus payment rules so that tax-free bonuses can be awarded to employees without directors necessarily also having to be included which would make EOTs more attractive. The government have noted that any amendments would need to keep ensuring that the bonus payments cannot be weighted in favour of directors and the highest paid, or otherwise be exploited.
Tax treatment of contributions to the EOT
Due to the fact that the EOT itself will be a newly incorporated company with no cash or assets itself, any part of the purchase price which is payable on a deferred basis is likely to be funded by voluntary contributions to the EOT from the trading company out of its profits. These are effectively dividends being paid to its parent company and therefore dividend income tax would usually be payable.
The government are proposing that, provided that the EOT does not pay more than market value for the shares in the trading company, then these contributions will not be treated as taxable dividends.
The future of EOTs
The future of the EOT will remain to be seen following completion of the consultation, however, it would seem that we should expect at least some changes to be made to the qualifying criteria.
If you are considering selling your business and would like to consider pursuing the EOT option, we can work with you and your tax advisor/ accountant to ensure that the sale takes place in a manner which satisfies the regime prevailing at the time of the sale.
If you would like more information on employee ownership trusts, please contact our corporate team on 0161 475 7676 or get in touch via our contact form.
What is an EOT?
An EOT is a trust whereby the Trustee owns and controls a company for the benefit of all of the employees. Since 2014, EOTs have benefitted from various tax reliefs including potential capital gains tax relief for the seller(s) on a disposal of shares to an EOT.
As part of a sale of a company to an EOT, the seller(s) sell a majority of their shares to the EOT. It is common for part of the purchase price to be paid by the EOT to the seller(s) on completion of the transaction, with the profits of the trading company being used to pay the balance of the consideration owed by the EOT to the seller(s) on a deferred basis.
Key government proposals
The government are concerned to ensure that the tax advantages which may be obtained by disposing of shares via the EOT route are only obtained where the policy objectives underlining those reliefs, namely encouraging employee ownership and rewarding employees, have been satisfied, thereby seeking to prevent exploitation of tax relief where this is being used for “unintended tax planning”.
Some of the key government proposals forming part of the consultation are as follows:
Preventing former owners from retaining control of the EOT by making changes to the trustee board composition
Often the seller(s)/former owner(s) of the company will retain involvement in the company post-sale and may even still have control of the company. Whilst the government acknowledges the advantages associated with this by virtue of the company benefitting from the former owners’ experience and in-depth knowledge of the company, the government has noted how such board composition may prevent meaningful change being delivered for the employees of the company.
The government has therefore proposed that a majority of the directors of the trustee company must be persons who are not the former owners or persons connected to them, with any breach of these conditions after disposal being a disqualifying event which could lead to an immediate capital gains tax charge to the trustees or the former owner.
Trustee residency
Under the current legislation, there are no conditions regarding the residency status of EOT trustees. The government is proposing that the EOT trustees (as a single body of persons) must be UK resident in order for the sellers to qualify for the capital gains tax relief. This would prevent the trustees being an offshore trust company.
Increasing flexibility relating to the tax-free employee bonus
At present, subject to certain criteria, an EOT can pay up to £3,600 annually as a tax-free bonus to its employees. The government is proposing to amend the qualifying bonus payment rules so that tax-free bonuses can be awarded to employees without directors necessarily also having to be included which would make EOTs more attractive. The government have noted that any amendments would need to keep ensuring that the bonus payments cannot be weighted in favour of directors and the highest paid, or otherwise be exploited.
Tax treatment of contributions to the EOT
Due to the fact that the EOT itself will be a newly incorporated company with no cash or assets itself, any part of the purchase price which is payable on a deferred basis is likely to be funded by voluntary contributions to the EOT from the trading company out of its profits. These are effectively dividends being paid to its parent company and therefore dividend income tax would usually be payable.
The government are proposing that, provided that the EOT does not pay more than market value for the shares in the trading company, then these contributions will not be treated as taxable dividends.
The future of EOTs
The future of the EOT will remain to be seen following completion of the consultation, however, it would seem that we should expect at least some changes to be made to the qualifying criteria.
If you are considering selling your business and would like to consider pursuing the EOT option, we can work with you and your tax advisor/ accountant to ensure that the sale takes place in a manner which satisfies the regime prevailing at the time of the sale.
If you would like more information on employee ownership trusts, please contact our corporate team on 0161 475 7676 or get in touch via our contact form.