Seven key changes made to Employee Ownership Trusts in the Autumn Budget
Chris Blundell · Posted on: November 4th 2024 · read
In the Autumn Budget, HMRC announced changes to the taxation of Employee Owned Trusts (“EOTs”).
This was expected in that HMRC issued a consultation document in July 2023 under the last government proposing changes, but was also thought to have gone the way of the last government when they did not implement any of the suggested changes in the Spring 2024 Budget.
But, in a budget where the Chancellor was raising taxes including capital gains tax (CGT), it was a possibility that she may turn her attention to EOTs and the taxes that were leaking there through inappropriate use of the rules as defined by the Jul 23 Condoc. And she did just that!
Of the 7 changes announced two are positive, two are administrative, two are negative.
One unexpected change means that for the shareholders of a company that is sold to an EOT, for them not to have to pay CGT on what they sell their shares for, the company and the EOT must continue to meet all the relevant conditions for the 4 tax years after the tax year of sale. Before today, the EOT and their company needed to meet the relevant conditions for only one tax year after the tax year of sale to the EOT.
One of the positive changes is the announcement that the government is to introduce legislation which is to exempt from tax in the hands of the EOT trustees, any contributions made to the EOT trustees by the company sold to the EOT to fund the EOT’s costs including cash paid on to the selling shareholders to meet the agreed sale price. This is to be welcomed as it confirms in legislative black and white what HMRC was concessionally allowing anyway.
The only unwelcome change is the requirement that for the tax relief to be available to the selling shareholders, the EOT to which the company is sold must be UK resident.
Of the 7 changes announced two are positive, two are administrative, two are negative.
On the face of it, this seems fair enough as it seems to be preventing tax avoidance using offshore trusts. In fact, why companies and their advisers used a non-resident EOT was not to avoid tax but to avoid double taxation. With this change, the EOT to which companies can be sold is limited to those that are UK tax resident. This means that on the EOT subsequently selling on the company, not only will the trust have to pay CGT at 24% on the gain they make on that sale and the gain passed to them by the selling shareholders, the proceeds from the sale of the company that they will then have left to distribute to the employee beneficiaries will then have to have income tax and NIC deducted from them.
If the employee is a 20% basic rate taxpayer paying NIC at 8%, that employee’s net share of the proceeds means he has suffered an effective 45.25% tax rate, And that’s for an ordinary working person. If the employee is a 40% taxpayer, still an ordinary working person with a payslip, their overall effective tax rate is nearly 56%. And neither of these examples considers that the employing company will also have to pay employer’s NIC, now at 15%, out of the net proceeds too.
The changes are not unexpected and to some extent, are welcome.
However, the new requirement for the EOT to be UK resident does not tackle unacceptable tax avoidance. Instead, it substantially increases the tax burden on the ordinary working man and woman on their share of the eventual sale proceeds when their employee-owned company comes to be sold. This may be an acceptable cost for the government to block off what they regard as tax avoidance, but it will make the EOT a much less attractive proposition for the ordinary employee beneficiary unless the government brings in some other measures to alleviate this double taxation.
Stay updated with MHA
Throughout the Autumn Budget, our tax experts and industry specialists have been sharing their insights on the measures announced that effect both businesses and private individuals.
Stay updated on the latest developments right here on our dedicated Autumn Budget hub.
