On Budget Day, the government released its response to recent consultations on Employee Ownership Trusts (EOTs) and Employee Benefit Trusts (EBTs), along with some amendments to the legislation.

The good news for us —and for our clients—is that these changes won’t impact how we deliver our employee ownership transitions.

However, for clarity we explain the main changes below:

• Independence Requirement: After the sale, sellers cannot make up 50% or more of the trustees, ensuring they don’t indirectly control the business post-sale (this has always been our approach to ensure best practice governance).
• Fair Market Valuation: Trustees must take all reasonable steps to ensure that the purchase price for the shares does not exceed fair market value and that where interest payable on the deferred consideration does not exceed a reasonable commercial rate. Most of our clients already sought an independent valuation by someone acting for the trust and this will remain best practice. Our trustee training sessions will continue to include an opportunity for the Trustee Directors to review and understand how the purchase price has been reached, and how this reflects fair market value.
• Offshore Trusts: To claim the EOT capital gains tax relief, the EOT must be UK-based (we have never established an offshore trust).

Flexibility for Income Tax-Free Bonuses

A minor update now allows employee owned businesses to exclude directors from the income tax-free bonuses if they wish. This is only optional, but may suit some businesses.

Extended Clawback Period for CGT relief

Sellers should note this change carefully. If there is a Disqualifying Event in the tax year the EOT acquires a majority of the shares or in any of the four subsequent tax years, the capital gains tax relief claimed by the selling shareholders no longer applies.. Previously this “clawback period” expired at the end of the first full tax year after the year the sale took place.

There are a number of Disqualifying Events, but the two most obvious are usually the EOT ceasing to hold a majority of the shares in the company (e.g. the company has been sold) or the company ceases to be a trading company (e.g. it has entered insolvency).

This change only applies to transitions that take place after 29^th October 2024.

Overall

By protecting against potential abuse, these changes to the legislation makes the future of EOT’s more secure than ever.  Our focus now is on continuing the growth of the EO sector, and helping the many businesses that are looking for a sustainable long term solution to ownership succession, to begin their employee owned futures.  We believe that in employee ownership, employees should be enabled to have a real voice in the organisations they work in and share in the wealth that they help create; and look forward to helping many more businesses make this a long-term reality.