The recent changes to Employee Ownership Trusts (EOTs) announced in the October 2024 budget have sparked significant reactions among businesses, advisors, and employee ownership advocates.
These reforms aim to ensure EOTs serve their intended purpose—genuine employee ownership—while preventing misuse for tax avoidance.
Key Changes and Reactions:
1. Governance and Independence:
- Founders can no longer retain direct or indirect control over the EOT after selling their shares, and trustees must now be independent, with more than 50% being unrelated parties. This ensures the trust genuinely operates in the employees’ interest. Many see this as a positive step toward greater transparency and fairness in EOT governance.
2. Trustee Residency and Market Valuation:
- Trustees must now be UK residents, and all share purchases must reflect market value. This is intended to tighten oversight and align EOTs with UK legal and tax frameworks. Businesses appreciate the added clarity, although it raises compliance requirements.
3. Extended CGT Relief Clawback Period:
- The period for potential clawback of Capital Gains Tax (CGT) relief has been extended from one to four tax years. While this ensures sustained compliance, it may increase risks for sellers during the extended period.
4. Bonus Flexibility:
- Directors can now be excluded from employee bonus distributions without affecting the tax-free status of the bonuses. This change is seen as aligning better with the principles of employee benefit sharing.
5. Increased Reporting and Compliance:
- New reporting requirements for CGT relief claims and more rigorous standards for proving share valuations have been introduced, adding administrative burdens but enhancing fairness.
Broader Reactions:
- Support from Advocates:
The changes are welcomed as they promote the integrity of the EOT model, encouraging its use as a legitimate succession planning tool rather than a tax avoidance scheme. - Concerns Among Sellers:
Some concerns have been raised about the increased administrative complexity and the extended CGT relief risk period, which could deter smaller businesses from adopting the model.
Overall, the reforms aim to balance promoting employee ownership with tightening rules to prevent abuse. Many expect the changes to solidify the credibility and sustainability of EOTs, ensuring they remain a viable option for business succession planning.
The recent changes to Employee Ownership Trusts (EOTs) announced in the October 2024 budget have sparked significant reactions among businesses, advisors, and employee ownership advocates.
These reforms aim to ensure EOTs serve their intended purpose—genuine employee ownership—while preventing misuse for tax avoidance.
Key Changes and Reactions:
1. Governance and Independence:
- Founders can no longer retain direct or indirect control over the EOT after selling their shares, and trustees must now be independent, with more than 50% being unrelated parties. This ensures the trust genuinely operates in the employees’ interest. Many see this as a positive step toward greater transparency and fairness in EOT governance.
2. Trustee Residency and Market Valuation:
- Trustees must now be UK residents, and all share purchases must reflect market value. This is intended to tighten oversight and align EOTs with UK legal and tax frameworks. Businesses appreciate the added clarity, although it raises compliance requirements.
3. Extended CGT Relief Clawback Period:
- The period for potential clawback of Capital Gains Tax (CGT) relief has been extended from one to four tax years. While this ensures sustained compliance, it may increase risks for sellers during the extended period.
4. Bonus Flexibility:
- Directors can now be excluded from employee bonus distributions without affecting the tax-free status of the bonuses. This change is seen as aligning better with the principles of employee benefit sharing.
5. Increased Reporting and Compliance:
- New reporting requirements for CGT relief claims and more rigorous standards for proving share valuations have been introduced, adding administrative burdens but enhancing fairness.
Broader Reactions:
- Support from Advocates:
The changes are welcomed as they promote the integrity of the EOT model, encouraging its use as a legitimate succession planning tool rather than a tax avoidance scheme. - Concerns Among Sellers:
Some concerns have been raised about the increased administrative complexity and the extended CGT relief risk period, which could deter smaller businesses from adopting the model.
Overall, the reforms aim to balance promoting employee ownership with tightening rules to prevent abuse. Many expect the changes to solidify the credibility and sustainability of EOTs, ensuring they remain a viable option for business succession planning.
Andrew Watkin
Andrew is the director of Assynt Corporate Finance Limited and an Accredited Member of the Association of Crowdfunding experts.
Previously a partner and head of corporate finance at Baker Watkin LLP, Andrew has more than 40 years of experience in all forms of corporate finance across many business sectors.
Andrew was the Chair of Governors at a local school for six years retiring in December 2020 and continues to be an Assessor of Expeditions for The Duke of Edinburgh's Award.
You can find out more and connect with Andrew over on LinkedIn.
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