Are Employee Ownership Trusts a More Attractive Succession Model Following the 2024 Autumn Budget?

Our view is that the legislative changes are sensible measures which will improve the regulation of EOTs and further promote their use for their intended purpose.

Coupled with the changes to the rates of CGT on other share disposals, we expect that EOTs will become an increasingly popular succession model in the coming years.

EOTs were established in 2014 to promote employee ownership as a business model in the UK.

The Finance Act 2014 introduced tax reliefs to benefit the selling shareholders on the sale of shares to an EOT and the company's employees, provided certain conditions are satisfied.

The previous Government launched a consultation seeking views on various proposals to reform EOTs.

In the Autumn Budget, the Labour Government unveiled its response to this consultation, which included a number of changes to the legislation governing EOTs.  

The changes announced include:

• Making changes to the conditions for obtaining relief from CGT on disposal of a controlling shareholding in a company to the trustees of an EOT being:
  • Restricting former owners of a company from retaining control of a company now majority-owned by an EOT by virtue of control of the EOT;
  • A requirement that the trustees of an EOT must be UK residents (as a single body of persons) at the time of disposal to the EOT, bringing an end to the companies being owned by offshore trusts going forward; and
  • Enshrining in law a requirement that the trustees of EOTs take reasonable steps to ensure that the consideration paid to the selling shareholders to acquire the company shares does not exceed the market value of those shares, these changes to the conditions will have an effect for disposals made to the trustees of an EOT on or after 30 October 2024;

• A new requirement that selling shareholders provide within their claim for CGT relief information on the sale proceeds and the number of employees of the company at the time of disposal;
• The period within which CGT relief can be withdrawn from the selling shareholders if the EOT conditions are breached post-disposal will be extended to the end of the fourth tax year following the end of the tax year of disposal (before the announced changes in the Autumn Budget the clawback period was the end of the following tax year after the disposal);
• Allow for Income Tax-free bonuses (up to the limit of £3,600) to be made to the employees of EOT-owned companies without including the directors of the company in the bonus reward; these changes will have effect from 30 October 2024; and
• Introduce a new relief effective from 30 October 2024 to provide certainty over the distributions tax treatment of contributions paid to the trustees of an EOT to fund costs associated with setting up the EOT.

The Government hopes the changes announced will:

• Ensure that the tax reliefs are not abused to obtain unfair tax advantages to the detriment of the interests of the employees of companies owned by EOTs
• This will improve individuals' experience of dealing with HMRC, as associated changes will simplify the process of disposing of company shares to an EOT.

In summary, the changes announced will not impact the main tax advantages available (including the 100% CGT relief) to selling shareholders and the employees of EOT-owned companies and, on balance, should have a positive impact on the employees of EOT-owned companies as the changes are intended to reinforce employee engagement and participation.

The principal advantage for the selling shareholders who sell their shares to an EOT is the beneficial tax treatment offered.

The Finance Act 2014 offers selling shareholders 100% relief from CGT on the disposal of their shares, provided strict requirements are adhered to.

In the Autumn Budget, the Chancellor announced that the rates of CGT will increase from 10% to 18% (at the basic rate) and from 20% to 24% (at the higher rate) for the disposal of assets (other than residential homes) made on or after 30 October 2024.

In addition, the Chancellor has confirmed that the rate of CGT that applies to BADR will increase from 10% to 14% for disposals made on or after 6 April 2025 and from 14% to 18% for disposals made on or after 6 April 2026.

In recent years, we have seen employee ownership become increasingly prevalent, with EOTs gaining traction as an ownership structure due to the significant benefits it offers to both the present owners (the selling shareholders) and the business's employees.

This trend is likely to continue as the number of EOTs continues to grow.

The changes made to CGT in the Autumn Budget make EOT ownership an even more attractive succession model for current business owners, provided that their business is suitable for employee ownership.

Myerson's corporate and employment lawyers have extensive experience advising clients of all sizes across various sectors on establishing and implementing EOTs.

In the last month, Myerson assisted three clients with their conversion to EOT ownership, and Myerson Solicitors successfully transitioned to 100% employee ownership in September 2024.