Tax benefits may be limited for Employee Ownership Trusts

With a government consultation on the "use & effectiveness" of the Employee Ownership Trust tax regime expected later this year, the tax benefits of selling your business to an EOT, free of CGT may well be limited by legislation in the near future.

In April, the Government announced several measures (23 to be precise) to simplify and modernise the tax system, and to tackle the tax gap. Employee Ownership Trusts (EOTs) will be under particular scrutiny, with a consultation expected later this year on the "use and effectiveness" of the EOT tax regime to "ensure that the reliefs are targeted closely at incentivising EOTs as an employee ownership business model, whilst preventing the reliefs from being used for unintended tax planning”.

We see this as a clear message that the EOT legislation, as it currently stands, is seen by HMRC as facilitating an unintended tax reduction. We expect they are particularly focussed on the belief that business owners see EOTs as a way to avoid Capital Gains Tax (CGT), rather than as a way to encourage employee ownership.

Therefore, the tax benefits of selling your business to an EOT free of CGT may well be limited by legislation in the near future.

If you are contemplating a sale to an EOT or would like to find out more about the benefits of EOTs for business owners and employees, the advice is to act sooner rather than later to ensure you benefit from the tax reliefs as they currently stand.

To find out more about Employee Ownership Trusts and the potential impact of the upcoming government consultation, you can listen to our podcast , or get in touch with our employment tax team.