November 23, 2023

Employee Ownership Trusts & Employee Benefit Trusts: Changes on the horizon – are you prepared?

Posted in Corporate, Employment

Earlier this year, the Government announced that it would be reviewing two types of employee trust, namely Employee Benefit Trusts (EBT) and Employee Ownership Trusts (EOT), and potentially introducing changes to the way in which such trust vehicles operate.

This review took the form of a HMRC consultation (concluded on 25 September 2023) which sought views on proposals for targeted reform to the respective tax regimes, the purpose of which was to ensure that EBTs and EOTs are used for the overriding objective of achieving employee engagement.

EBTs and EOTs defined

An EBT is a trust that serves to benefit employees or office holders of companies. An EBT can be created for a number of reasons, including facilitating the reward of key employees through share ownership or by administering benefits such as health cover.

An EOT is a specific type of EBT that benefits from various tax reliefs.  A seller of shares to an EOT is potentially eligible for relief from capital gains tax and a company controlled by an EOT is able to pay an annual tax free bonus of up to £3,600 per employee.  As a result, EOTs in particular have significantly increased in popularity since their introduction a decade ago.

The Consultation

Whilst popularity for these trusts have risen, the Government has grown concerned that they are not being used in the way they are intended – to encourage employee engagement.  There has been a trend that sees existing directors and founders staying with the business whether as directors of the trading company or as trustees or director of a trustee company.  There is a perfectly sensible rationale for this.  The trading company is able to benefit from continuity of management and the experience the existing directors bring. There is however the risk that this acts as a disincentive to employees more generally taking control over business decisions.  The Government is keen to ensure that EOTs are not abused to give tax advantages to company owners without any genuine increase in employee engagement.

To address these concerns, it has made certain proposals including:

  • a requirement that over half of the trustees of the EOT are people who are not the former owners or persons connected with them;
  • requiring trustees to be UK residents (or a mix of UK and non-UK residents) and the former owner(s) to be a UK resident on the date that the shares were disposed of; and
  • allowing bonuses to be awarded to employees without having to include directors in such bonus payments.

A full list of the proposals, which can be read here.

Next steps

The consultation has now concluded and we await with interest the results of the review.

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