New legislation for Employee Owner Trusts (EOTs) came into effect on 30 October 2024 with an announcement of a series of changes. With more than 1,400 EOTs in the UK1, this series of changes will significantly impact businesses and business owners as the updates aim to make EOTs more robust and address potential misuse.ย
Hayley Blackburn, Chartered Legal Executive in the Corporate team at Blacks Solicitors, discusses these changes and what businesses need to be aware of.
New control limits for Employee Owner Trusts
Former owners or their connected persons are now restricted from maintaining control of the company via the Employee Ownership Trust (โEOTโ) after its sale. This means that after selling their shares to the EOT, former owners cannot retain control by influencing the EOT. For example, sellers must relinquish their majority voting rights and they are unable to appoint family members who they may be able to influence. These new control limits aim to ensure that ownership of the business is truly transferred to the employees.
EOT trustee residency requirement to mitigate tax avoidance
Trustees of the EOT must be UK residents at the time of disposal. This requirement ensures that the EOT relief functions as a tax deferral rather than an exemption and mitigates the risk of tax avoidance. This new requirement aims to prevent non-UK residents from exploiting the system to avoid UK Capital Gains Tax (โCGTโ).
Tax treatment on contributions
Contributions to the EOT by the company will be treated as distributions. However, these contributions remain tax-free if they are used to repay sellers for their shares or to cover acquisition costs, including stamp duty and reasonable interest on deferred consideration. This provides clarity on how contributions are taxed and ensures they are used for legitimate purposes.
Valuation requirement
Trustees are required to take โreasonable stepsโ to ensure that the amount paid for the companyโs shares does not surpass the market value at the time of sale.
Although detailed guidance on what constitutes reasonable steps has not yet been provided, it is evident that failing to comply with this requirement has serious repercussions. If trustees are unable to demonstrate that they took reasonable steps, the disposal will not be eligible for CGT relief. Furthermore, any contributions received by the trustees from the company will be treated as taxable distributions.
Extended disqualifying events period
The period during which the company must satisfy the qualifying conditions for CGT relief has been extended from one tax year to four tax years following the year of disposal. Consequently, if a disqualifying event occurs within the first four tax years of the EOT, the CGT relief previously granted to the vendor shareholders will be revoked and will become payable on the gain that was released at the time of disposal.
Blacks Solicitors are available to offer more information and advice on Corporate law.
First Event is a great example of a company transitioning to employee ownership.
