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HMRC consultation could limit tax benefits of EOTs

By July 31, 2023No Comments

Revenue officials in the UK have launched an open consultation on the tax treatment of Employee Ownership Trusts and Employee Benefit Trusts.

The purpose of the consultation is to ensure that the tax regimes for EOTs and EBTs continue to reward employees and encourage employee ownership, whilst preventing tax advantages being obtained through use of trusts outside of their intended purpose. The move could lead to the introduction of restrictions that limit the use of EOTs and EBTs as a means to avoid capital gains tax (CGT)

The number of employee-owned companies in the UK has more than doubled to 1,300 over the past three years due to a large increase in the number of EOTs. Currently, a business owner pays no CGT if they dispose of 50% or more of their shares to a trust, so long as the trust then holds a controlling interest in the company. However, the owners could keep de facto control of the company if they form a majority on the EOT’s board of trustees.

HMRC is proposing legislation is amended to require that more than half of the EOT’s board of trustees are persons other than former owners or people connected with them.

The UK government introduced the EOTs tax benefits in 2014, following the Nuttall Review of Employee Ownership, which found that employee-owned companies perform better than other companies.