In this article we look at the government’s proposed amendments to the EOT tax regime. On 27 April 2023 they announced their intention to publish an EOT consultation, which we discussed in this article. The consultation will run until 25 September 2023, and full details are linked here.
What are EOTs?
In short, an EOT is an indirect ownership model. No employee directly has the right to own or sell shares, but the EOT holds the shares for the benefit of the employees of a company. There is a significant tax break (effectively a tax free sale) available to selling shareholders when they sell to an EOT if they meet certain criteria.
We talk in greater detail about what an EOT is in this article.
Why has the government launched this consultation?
The government has stated the aim of the consultation is to ensure the tax regimes of EOTs and EBTs are focused on their objective of rewarding employees and encouraging employee ownership, “whilst preventing tax advantages being obtained through use of these trusts outside of these intended purposes”.
What changes are the government proposing?
The key changes that the government are proposing are as follows:
- Preventing the selling shareholders, or parties connected to them, from being the majority of the trustees of the EOT to try and ensure that there is meaningful change for the employees of the company.
The government is also considering if further conditions should be placed on the appointment of the trustees, for example requiring that the trustees include people from specific groups (such as employees).
- Requiring the trustees of an EOT to be a UK resident as a single body of persons.
The government will still allow non-UK residents to be appointed as trustees. However, the EOT would need to be UK resident as a single body of persons. This change is proposed to try and stop instances where non-resident EOTs were established by the appointing solely non-UK trustees as part of an arrangement to reduce Capital Gains Tax liabilities.
- Reducing the number of clearance applications that advisers typically make as part of an EOT transaction.
The government is also proposing changes to the £3,600 tax-free bonus that a company owned by an EOT can pay to their employees. We'll discuss this proposed change further in a separate article.
Are these changes already in force?
The changes are not in force, they are changes that the government are currently considering making to the tax regime of EOTs.
The government is seeking views on their proposed changes to the tax regimes of EOTs and EBTs. They are asking interested parties to respond to ten summary questions. If you'd like to take part in the consultation process you can do so by clicking here. The deadline for responses is 25 September 2023.
How can we help?
If you are interested in learning more about EOTs or want to discuss whether an EOT is right for your business, then please contact John Kahn.
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