Employee Ownership Trusts
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AuthorsStephen HadlowMairead Platt
3 min read
The Autumn Budget introduced new reforms to employee ownership trusts (EOTs) that enhance good models of employee ownership and reinforce the supporting framework around EOTs.
Here, specialist employee ownership lawyers Stephen Hadlow and Mairead Platt set out what these changes mean for business owners considering an employee ownership exit.
The Chancellor of the Exchequer used the opportunity presented by the Autumn Budget to conclude the EOT consultation that has been in progress for many months. The changes have been widely expected and are broadly to be welcomed.
These updates ensure that EOTs serve genuine employee ownership purposes, rather than being misused to try and avoid tax.
Here’s an overview of the seven key changes:
Founders can no longer retain direct or indirect control after a sale to an EOT. Additionally, trustees must now be independent, with more than 50% being individuals who aren’t ‘excluded participators’.
Trustees are now required to be UK residents to ensure that in the event of a ‘disqualifying event’ (such as loss of control), UK capital gains tax (CGT) is payable by the trustees.
Tax-free status has been confirmed for contributions that repay former business owners, strengthening financial clarity for EOTs.
When awarding employee ownership bonuses to employees, it’s now possible to exclude directors from the award.
The period in which a disqualifying event would trigger a clawback of CGT relief for founders has been extended to the end of the fourth tax year following the tax year of the transaction. This marks a change from the previous position where the period expired at the end of the next tax year.
Trustees must now actively ensure that share purchase prices reflect market value and — if the purchase price is deferred — that any interest applied doesn’t exceed a reasonable commercial rate.
To claim CGT relief, sellers must now provide detailed reporting on sale proceeds and employee numbers.
These changes take a much-needed step towards greater clarity, independence and fairness in employee ownership structures, making EOTs a viable yet regulated exit strategy.
With around 1,400 companies adopting EOTs by the end of 2023, this will continue to be a popular route for exit planning since we wouldn’t expect that any of these reforms will stymie the growth of the employee ownership sector.
Interestingly, there’s still no cap on the size of gains that qualify for tax-free treatment, allowing EOT relief to remain effective across varied transaction sizes. Indeed, the changes to standard CGT rates arguably create a better financial incentive for owners who are considering transferring their business to an employee ownership model.
As recognised experts in employee ownership trust exits and specialist advisors by the Employee Ownership Association, our team is perfectly placed to advise on your exit and succession strategy.
To find out more about why employee ownership might be the best route for your business, talk to us by giving us a call, sending us an email or completing our contact form below.
Stephen Hadlow
Stephen is a Partner in our corporate team. He's actively involved in structuring disposals to Employee Ownership Trusts.
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