Autumn Statement 2023 & Employee Ownership Trusts

Currently, the way the tax legislation is set up around Employee Ownership Trusts (EOTs), when an EOT sells a company’s shares it will have to pay capital gains tax (CGT) at 20% on the gain.

One thing that needs to happen on Employee Ownership Trusts at the Autumn Statement

The EOT’s gain will in most cases by pretty much the whole of the sale proceeds. The issue arises when the EOT trustees then pay the net proceeds onto the employees who are beneficiaries of the EOT. The employees will then need to pay income tax and NIC on the whole of the net proceeds paid to them at combined rates of up to 47%, whilst the employer will additionally have an Employer’s NIC bill of 13.8% on the sums paid to the employee beneficiaries. This is essentially double taxation for which there is no relief currently. It is for this reason that many companies setting up EOTs have chosen to locate them outside the UK in a location like Jersey or Guernsey to prevent this double taxation.

HMRC’s Consultation Document issued in July this year proposed preventing the trustees of an EOT being resident outside the UK so that they would always be liable to 20% CGT were they to sell the company’s shares they own. If this measure is brought in, HMRC need to bring in measures to eliminate this double taxation, like the concessionary measures that exist if a company pays a dividend to an EOT trustee which is then paid on to employees. I urge the Government to bring in such measures if they decide to prevent the trustees of an EOT being resident outside the UK.

The Employee Ownership Trust (EOT) has become a valuable vehicle which allows companies to be sold into the indirect ownership of their employees. It has become increasingly popular since it was introduced in 2014 particularly with the opportunity that it gives for owners to sell their shares to the EOT without having to pay CGT, and the opportunity it gives to employers to pay income tax free bonuses of up to £3,600 per employee per tax year.

HMRC’s July 2023 Consultation Document suggested that they were considering preventing the trustees of the EOT being based outside the UK. This was a change put forward by, amongst others, the Chartered Institute of Tax and is to stop EOTs from avoiding the CGT the EOT legislation imagined would be paid when the EOT sold on the company to a third-party buyer. In such a situation, if UK resident, they would pay CGT on not only their own gain but also the gain inherited from the original sellers of the shares to the EOT.

People had however been arranging for the EOT trustees to be non-resident to avoid the double taxation that would arise when the trust sells on the company because an offer for the company has come along which is too good to be refused. If the trust is UK resident, it will be due to pay CGT on the gain it makes on sale. Then when it distributes the net of tax proceeds to the employees, they are then due to pay employment income tax and NIC of up to 47% under PAYE on what they receive. As well their employer will have a 13.8% employer's NIC liability on what is paid to the employees. This means that of £100 of proceeds only £42.40 will end up in the employee's hands, an effective tax rate of nearly 58%. And the employer will have an Employer’s NIC bill of £13.80 on top of this. The employer won’t be able to get the employees to pay this but if they could this would reduce the £100 of proceeds to just £28.60 or an effective rate of over 71%.

Unlike with dividends, where trustees of an EOT pay the net proceeds out to the employee beneficiaries, they can’t reclaim any of the CGT they have had to pay. This needs to change if EOTs are to continue to be used to pass businesses on to their employees.

For more insights on potential measures from the Chancellor in his Autumn Statement, view our full Wishlist article.