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The landscape of employee ownership changed in the Autumn 2024 Budget, which introduced several amendments to the rules.
26 February 2025
The landscape of employee ownership has seen some significant changes with the recent Budget introducing several key amendments to the rules.
These changes have caused several uncertainties for businesses and trustees.
An Employee Ownership Trust (EOT) is an increasingly popular business model where a trust holds a long-term controlling shareholding in a company on behalf of all its employees.
An EOT structure offers several attractive tax reliefs to encourage employee ownership including a 0% capital gains tax (CGT) relief when shares are transferred to an EOT and income tax relief on employee bonuses of up to £3,600 per year.
Newly established EOTs do not typically have any funds of their own to pay for the acquisition of shares in a company. It is therefore common for the consideration to be funded through contributions from the company to the EOT.
Historically, it has been necessary to seek advance clearance from HMRC to confirm that they would not seek to tax those contributions as distributions in the hands of the EOT.
In a step billed by the Government as reducing the administrative burden on EOTs, new legislation was announced in the Budget to confirm that such contributions will not incur income tax in so far as they are used to pay for the "acquisition costs" of the EOT, removing the need to apply for HMRC clearance.
The definition of acquisition costs has however, been criticised by many as too narrow, and despite a recent amendment to expand this to cover a wider range of costs, critically, it excludes any ongoing costs incurred by an EOT, such as the payment of independent trustees fees.
The new legislation is still in draft pending enactment of the Finance Bill. However, it raises the question of whether HMRC now intends to treat the payment of ongoing costs by a company on behalf of an EOT as a taxable distribution in the hand of the EOT.
If this is the case, then many EOTs could become subject to income tax on the payment of costs which were previously considered non-taxable.
Another change announced in the Budget is that the period within which tax relief on the sale of an EOT can be recovered from the vendors if the EOT conditions are breached will be extended. It can now be recovered from the vendors for four years following the end of the tax year of disposal. (Pre 30 October 2024 it was limited to the end of the tax year following that in which the disposal occurred).
This has the potential to create uncertainty for vendors who may be liable for resulting tax liabilities, despite having no control over the business or the EOT after the sale.
Trustees must now also take ‘reasonable steps’ to ensure that the consideration paid for shares does not exceed their fair market value. Failure to comply with this could disqualify the disposal of shares to the EOT from CGT relief and expose trustees to tax on company distributions.
This change aligns with good practice and therefore should not, in theory, represent a major change to the way in which EOT transactions are carried out.
However, ‘reasonable steps’ has not so far been defined, which does raise some uncertainty for trustees on what HMRC’s expectations will be.
Other key changes announced in the Budget are as follows:
The ongoing progress of the Finance Bill through Parliament will be closely watched by stakeholders, who will be keen to see how these uncertainties are addressed and what the final legislation will look like.
If you have questions about these new measures for Employee Ownership Trusts or want to learn more about other changes from the Autumn Budget, don’t hesitate to speak to our experts.
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