Consultation outcome

Taxation of Employee Ownership Trusts and Employee Benefit Trusts - summary of responses

Updated 30 October 2024

1. Executive Summary

On 18 July 2023 the previous government published a consultation on the Taxation of Employee Ownership Trusts (EOTs) and Employee Benefit Trusts (EBTs). The consultation sought views on targeted proposals to ensure that the regimes remain focused on the objectives of rewarding employees and encouraging employee engagement. The government is grateful to all those who responded to this consultation.

The proposed changes were met with broad agreement from respondents to the consultation. The government will proceed with implementing changes to the EOT and EBT regimes as part of a package of reforms to:

• restrict former owners or persons connected with former owners from retaining control of companies post-sale to an EOT by virtue of control (direct or indirect) of the EOT
• require that the trustees of an EOT must be UK resident (as a single body of persons) at the time of disposal to the EOT
• confirm in legislation that contributions made by a company to an EOT to repay the former owners for their shares will not be charged to income tax as a distribution
• ease the EOT income tax-free bonus provisions to allow bonuses to be awarded to employees without directors being included
• extend the period of time within which the relief can be withdrawn from the former owner if the EOT conditions are breached post-disposal, to the end of the fourth tax year following the tax year of disposal
• require that the trustees must take reasonable steps to ensure that the consideration paid to acquire the company shares does not exceed market value
• require that individuals provide within their claim for Capital Gains Tax (CGT) relief information on the sale proceeds and the number of employees of the company at the time of disposal
• confirm in legislation that the restrictions on connected persons benefiting from an EBT must apply for the lifetime of the trust
• only allow the Inheritance Tax (IHT) exemption for EBTs where the shares have been held for 2 years prior to settlement into the EBT
• require that no more than 25% of employees who are able to receive income payments from an EBT should be connected to the participators of the company

In addition to these legislative changes, in line with wider practice on anti-avoidance motive tests, HMRC will from 30 October 2024 onwards cease to provide clearances to companies and their advisers on the application of section 464A Corporation Tax Act 2010 to a transaction to establish an EOT.

2. Introduction

The consultation

An employee trust is a trust which is set up for the benefit of the employees or office holders of a company or group of companies. Such trusts are often referred to as EBTs for tax purposes. EBTs may be set up for a range of purposes, for example to reward and motivate key employees through share ownership or to provide employees with benefits such as health cover.

An EOTs is a specific type of EBT whereby the trustees own the company, and exercise control of the company for the benefit of all the employees. EOTs are given tax-favoured treatment through tax reliefs which were introduced in 2014.

A consultation ‘Taxation of Employee Ownership Trusts and Employee Benefit Trusts’ was held between 18 July 2023 and 25 September 2023, seeking views on targeted proposals in relation to the tax treatment of these trusts. The key principles underpinning those reforms are to ensure that the favourable tax treatment remains available to those who use EBTs and EOTs for the intended policy purposes, whilst preventing tax advantages being obtained through use of these trusts outside of these intended purposes.

About the responses

The consultation received 98 written responses. 40 responses were received from professional firms or advisors, 14 from representative bodies or research groups, 15 from EOT-owned companies, 17 from co-operative businesses and 12 from individuals. During the consultation period HMRC also held meetings with a number of interested parties including representative bodies and advisory firms.

Where responses were received which covered subjects outside the scope of the consultation, these were noted and may be considered as part of future or ongoing reviews of this policy.

3. Responses

Employee Ownership Trusts: Conditions affecting trustee appointments

The consultation proposed reform to the conditions relating to trustees of EOTs. In particular, the consultation proposed that former owners (or persons connected to the former owners) be prevented from retaining control of the EOT, and sought views on whether further conditions on the composition of the trustee board should be introduced.

Question 1: Do you have any comments on the proposal to prohibit former owners and connected persons from retaining control of an EOT-owned company post-sale by appointing themselves in control of the EOT trustee board?

90 respondents answered this question.

The majority of respondents welcomed this proposal, considering this approach to be sensible and in line with existing best practice.

Respondents recognised that allowing former owners to retain control of the company via the EOT can give the impression that nothing meaningful in the management of the company had changed. However, some noted that this concern should be mitigated by the strict legal duty that trustees have to act in the interests of their beneficiaries (in the case of an EOT, the employees).

Many respondents emphasised the importance of allowing former owners to remain on the trustee board, albeit without retaining control. Respondents noted that former owners have experience of the business and can provide guidance and support to employee trustees, especially in the period immediately following the sale. As a result, respondents agreed that any change in the rules should not be so restrictive as to prohibit former owners from being appointed to a minority position on the trustee board.

Some respondents noted that even with the restrictions proposed, former owners may still have influence over those appointed to the trustee board, especially if those appointees were professional advisors who assisted during the sale. Some noted that a degree of influence is to be expected where former owners are owed deferred consideration, and suggested allowing former owners control over some matters for the period in which the sale consideration was still outstanding.

Several respondents proposed including a ‘grace period’ in the provisions to allow EOT-owned companies time to appoint new trustees if an event out of their control meant that the requirements were not met. It was felt that flexibility within the rules would be needed because it can take time to find appropriate replacements and without a grace period a CGT charge would immediately arise. Respondents suggested a period of 6 to 12 months before a disqualifying event occurred.

Many respondents asked for the definition of ‘former owner’ to be carefully considered, so as not to include anyone with even a small shareholding in the company. Some companies may have gifted shares to employees prior to sale to an EOT and without a de minimis limit on shareholding smaller companies may be unable to meet the requirements.

Government response

The government is grateful for the detailed consideration given by respondents to this question. The government will proceed with introducing restrictions to ensure that former owners (or persons connected with former owners such as spouses or civil partners) cannot retain control of the company post-sale by virtue of control of the EOT.

With effect from 30 October 2024, for a disposal to an EOT to qualify for relief the majority of the trustees of the EOT must consist of persons other than:

• the former owners
• persons connected with the former owners
• companies under the control of the former owners or connected persons
• companies where half or more of the directors are former owners or connected persons

Additionally, the persons listed above must not be able to exercise control of the EOT through powers under the trust deed. A breach of these restrictions at any time following disposal would result in a ‘disqualifying event’ and the loss of favourable tax status for the EOT. These restrictions will not apply to EOTs established before 30 October 2024.

Question 2: Should the government go further and require that the EOT trustee board includes persons drawn from specific groups, such as employees or independent persons? If so, how should these groups be defined?

88 respondents answered this question.

The majority of respondents agreed that it is best practice for EOT trustee boards to contain an employee representative and an independent trustee. However, opinions were mixed on whether it was appropriate to mandate this best practice as a legal requirement.

Of those who did agree with the proposal to require EOT trustee boards to include persons from specific groups, the proposal to include employee representation attracted the most support. This, some respondents felt, would ensure that employees have a say in major decisions and would increase the diversity of thought on trustee boards. Some suggested the employee representatives could be elected through a democratic process of some kind, but there was a general wariness on making any rules too prescriptive, especially for small businesses. Some noted that the role of trustee comes with significant statutory duties and without adequate training and support employees may be reluctant to volunteer for the role.

Although many respondents highlighted the benefits of having independent trustees bring their experience and fresh perspective to EOT-owned businesses, the majority felt that making this a requirement in the legislation would be too prescriptive. Respondents noted the relatively small pool of experienced independent trustees that businesses can recruit from, and the high cost of doing so, especially for smaller businesses.

For the respondents that disagreed that the trustee board should contain persons drawn from specific groups, the majority highlighted the complexities that this would bring to the legislation, the cost implications for smaller businesses, and the difficulties inherent in mandating a certain structure which may not be suitable for all companies.

Some respondents noted the difficulty in defining the specific groups, particularly in relation to ‘independent’ trustees, and that there was no statutory requirement for trustees in other comparable legislation, such as EBTs or Share Incentive Plans. It was felt that defining the experience or expertise required to carry out the role of trustee effectively would be very difficult and hard to enforce.

Above all, although it is often considered best practice to have an independent trustee on each EOT board, respondents felt that it was more important to maintain flexibility to allow business to decide what was best for them. Concerns were also raised that companies would make inappropriate or ‘box-ticking’ appointments to the trustee board simply to comply with the tax legislation or may be put off from transitioning to an EOT structure altogether by the complexity of the requirements.

Government response

The government notes the mixed views respondents gave regarding additional requirements on the composition of the trustee board, such as a requirement to include employee or independent trustees. The government recognises the importance of allowing businesses to decide what is best for their particular circumstances and does not intend to introduce requirements to mandate that trustees be drawn from these or any other selected groups.

Employee Ownership Trusts: Trustee Tax Residency

At present, there are no conditions regarding the residency status of EOT trustees and therefore, by operation of the trust tax residency rules, the residency status of the EOT itself. To address concerns that non-UK resident EOTs could be established with the primary purpose of reducing tax on any subsequent disposal by the trustees, the government proposed in the consultation to introduce a requirement that the trustees of an EOT be UK resident as a single body of persons.

Question 3: do you have any comments on the proposal to require that the trustees of an EOT are UK resident as a single body of persons?

85 respondents answered this question.

The majority of respondents agreed that this was a sensible proposal which removes the possibility of an EOT structure being used as part of an arrangement to dispose of a company without suffering the usual CGT charge.

Respondents generally felt that the residency requirement would strengthen the legislation and remove the possibility of an offshore trust disposing of the shares in the company to a third party without the resulting CGT charge as part of a predetermined arrangement that had nothing to do with a true transition to employee ownership. It was noted that offshore arrangements are viewed negatively within the industry and are often not advised for vendors looking to transition to an EOT.

A small number of respondents disagreed with the proposal, emphasising the legitimate reasons for EOTs to be established with offshore trustees. Some highlighted the significant expertise located in offshore jurisdictions like the Channel Islands.

Some respondents noted that offshore EOTs may be established as a precautionary measure to avoid the potential for perceived ‘double-taxation’ if the EOT-owned company is sold at a later point; if resident in the UK, the consideration on sale would be subject to a CGT charge and then, when the net proceeds are distributed to beneficiaries, Income Tax and NICs in the hands of employees. An offshore trust on the other hand can distribute the full consideration to employees without any initial CGT charge, which can make it an attractive option from the point of view of the employees.

Some respondents suggested alternative arrangements, such as deeming that EOTs are treated as UK resident for tax purposes regardless of trustee residency, thus removing any tax advantage but allowing EOTs the flexibility to appoint trustees solely based offshore.

Respondents also asked for clarity on the position for existing offshore trustees – whether they would be brought into charge retrospectively, allowed a period of grace to appoint new trustees, or deemed to be UK resident for the purposes of UK tax on any sale of shares.

Government response

The government is grateful to all those who considered this question and acknowledges the broad support received for this proposal from the majority of respondents. The government will proceed with introducing a requirement to ensure that the trustees of newly created EOTs are UK resident.

With effect from 30 October 2024, for disposal to an EOT to qualify for relief the trustees of the EOT must be UK resident (as a single body of persons). A breach of this condition at any time following disposal would result in a ‘disqualifying event’ and the loss of EOT-status, as well as triggering an ‘exit charge’ to the trustees under existing provisions at section 80 of TCGA 1992. This restriction will not apply to EOTs established before 30 October 2024.

This will still allow flexibility for EOTs to be established with a mix of UK and non-UK resident trustees, provided that the settlor of the EOT was UK resident at the time the EOT was set up.

Employee Ownership Trusts: Funding issues

As newly established EOTs do not typically have sufficient funds themselves to purchase shares from the departing owner, the consideration is commonly left outstanding at the point of disposal and the departing owners are then paid over a period of time out of distributions of profits paid up from the company to the trustees. Due to uncertainty in the tax treatment of such distributions, it has become routine for parties to seek clearances from HMRC in advance of undertaking EOT transactions. The consultation proposed changes to ease this administrative burden by reducing the need for these clearances.

Question 4: Do you have any comments on the proposal to confirm in legislation the distribution treatment for contributions made by a company to an EOT to repay the former owners for their shares?

69 respondents answered this question.

Respondents were overwhelmingly in favour of confirming the distribution treatment in legislation. By far the most common reason given was that this treatment is already allowed in practice via clearances and confirming it in legislation would go some way to streamlining the process.

Many respondents considered that it should be mandated to acquire an independent valuation of the shares before transfer. Some wanted HMRC to be explicit on its understanding of the definition of open market value.

Some respondents requested further detail on whether funding EOT payments through loans would be acceptable, and to what extent associated costs such as professional fees, interest and Stamp Duty could be included as part of this tax free distribution.

Others sought clarity on the treatment of fees paid to independent trustees who would be expected to be remunerated for their time, on HMRC’s understanding of reasonable commercial interest if loans were used, and on the effects of deferred consideration.

A number of respondents recommended extending this tax-free distribution to all EBTs.

Government response

The government recognises the desire from respondents for legislative confirmation of the tax-free distribution treatment discussed above.

The government now recognises that the better reading of the legislation is that the payments are distributions and will introduce a new relief which will apply to contributions made to the trustees of an EOT to fund costs relating to the setting up of the EOT. The relief will ensure that income tax is not charged on such contributions as distributions.

As noted in the original consultation document, HMRC will remain bound by and continue to honour any clearances given on the treatment of these payments. In addition, HMRC will not seek to disturb the treatment of contributions to existing EOT trustees already undertaken in line with the conditions on which clearances were previously given, even where clearance was not sought from HMRC. Those conditions were that:

1. the contributions were to be used by the trustees of the EOT to meet their corresponding liabilities in relation to the acquisition of the relevant shares
2. that the consideration paid for the shares was no more than their market value

This was on the basis that the contributions were to be used to meet necessary expenditure aimed at creating and maintaining an employee trust structure for the benefit of the company by facilitating employee ownership and that the EOT was established in accordance with the relevant EOT legislation.

The relief, which will apply to all contributions made on or after 30 October 2024, will cover contributions made to the trustees of an EOT to fund the consideration (including deferred consideration, associated stamp duty and interest payable at a reasonable commercial rate) that is then paid to the former owners to acquire the shares. The relief will only apply where the trustees have taken all reasonable steps to ensure that they have purchased the shares for no more than market value.

This relief will only apply to contributions made to qualifying EOTs. As this relief is intended to ensure the tax treatment for distributions to EOTs, this relief will not extend cover contributions to EBTs more generally.

Question 5: Do you have any comments on the proposal that HMRC stops giving clearances on the application of Section 464A of the Corporation Tax Act 2010 to the establishment of EOTs?

58 respondents answered this question.

The majority were content with the proposal for HMRC to stop providing clearances on the possible application of the anti-avoidance provision in S464A CTA10.

One reason given was that as the provision only applies where there is an avoidance motive to the transaction, it is very unlikely to apply in the establishment of legitimate EOTs and clearance is therefore generally unnecessary.

Other respondents noted that they would be happy for clearances to no longer be given, but only if HMRC was able to provide additional guidance setting out their view of the application of S464A CTA10 to EOTs.

Only a tiny minority of respondents wanted the current clearance situation to continue.

Government response

HMRC does not generally provide clearances in respect of whether there are tax avoidance arrangements involved in a particular transaction, as the taxpayer is able to assess whether there is a tax avoidance motive.

The government notes the request for specific guidance on the application of section 464A to EOTs. Section 464A is an anti-avoidance rule with a motive test, and guidance on how and when this rule applies is available in HMRC’s Company Taxation Manual (CTM61570+). Provided an EOT is established for genuine commercial reasons and no tax avoidance purpose is present, then section 464A will not apply.

HMRC will therefore from 30 October 2024 no longer provide clearances to companies and their advisers on the application of S464A CTA10 to a transaction to establish an EOT.

Employee Ownership Trusts: Income Tax bonus issues

As part of the tax incentives designed to encourage the formation of EOTs, an employee-owned company can pay up to £3,600 annually as a tax-free bonus to its employees. The strict rules which govern the payment of the bonus gave rise to the concern that, in some limited circumstances, it can be difficult to administer the awarding of the bonus. The consultation proposed targeted changes to address these concerns.

Question 6: Should the EOT bonus rules be eased so that tax-free bonuses can be awarded to employees without directors necessarily also having to be included, and would this undermine protections which ensure that bonus payments are not abused or weighted towards some employees?

65 respondents answered this question.

The majority of respondents were in favour of an easement, but a substantial minority were against doing so, largely on the grounds that they felt it could undermine employee protections.

The main suggestion was to have the additional flexibility not to always include directors. This was tempered with recommendations that changes should not erode the ‘all employee’ principle: that bonuses should always have to be made available to more junior employees.

Apart from relaxation of the director rules, there were widespread calls for easements centred on the participation rules, particularly the way the rules function across corporate structures involving overseas subsidiaries. The key considerations were to:

• assess participation on a whole-group basis rather than per individual group
• restrict EOT bonuses to UK entities and allow exclusion of overseas entities

Question 7: Do the EOT bonus rules create any other unintended consequences or challenges administering the tax-free bonus payments?

75 respondents answered this question.

Some respondents had issues with the bonus being made available to employees of overseas subsidiaries – stating both that it is a challenge administratively, and that differences in buying power between UK and overseas workers’ salaries cause unfairness.

Respondents were concerned about potential discrimination. Without a banding system, bonuses could potentially benefit some employees more than others based on length of service or seniority.

On the other hand, the current rules also do not allow bonuses to solely benefit more junior or lower paid staff. EOT owner participants expressed the desire for more flexibility around these rules.

Several arguments put forward by industry figures stated that the tax-free bonus could be replaced by a tax-free dividend or a form of share scheme. This would, they argue, tie employee rewards more closely to the company’s performance.

A large number of respondents asked that the bonus maximum be increased from £3,600 per annum, as its incentive value is being eroded by inflation.

Despite respondents requesting changes which would result in making the administration of bonuses less complex, no respondents indicated that there were significant difficulties with administering the tax-free bonus payments under the current rules.

Government response

The government is grateful to all who responded to these questions. The government will proceed with an easement of the bonus rule so that bonuses can be awarded to employees without directors having to be included.

With respect to bonus payments made on or after 30 October 2024, the ‘participation requirement’ at section 312C of the Income Tax (Earnings and Pensions) Act 2003 (which requires that all employees be eligible for the bonus award) will be amended to allow for the exclusion of directors from the bonus award. This will make the bonuses easier to administer while increasing opportunities for lower paid employees to benefit.

The government has no current plans to increase the amount of the tax-free bonus nor to extend it to cooperatives.

Employee Ownership Trusts: Other issues

The consultation also invited respondents to set out other ways in which the EOT regime could be improved.

Question 8: In addition to the reforms proposed at Chapters 4 to 6, do you have any views on ways the Employee Ownership Trust tax regimes could be reformed to better support employee ownership?

80 respondents answered this question.

A wide range of comments were received from respondents regarding ways the EOT tax regimes could be enhanced. The following is not an exhaustive list.

Some respondents commented on the general efficacy of the EOT regime as a mechanism to ensure companies are run for the benefit of their employees. These respondents felt whilst the current policy aims to balance the interests of the employees with those of the former owners, in practice the balance is often skewed towards the latter.

Others, on the other hand, felt that concerns around the effectiveness of EOT ownership should be mitigated by the fiduciary duty incumbent upon EOT trustees to act in the best interests of the employees. They noted that the existence of this duty should be sufficient to prevent trustees or former owners from using the EOT structure as a way to avoid tax or to benefit persons other than the employees of the company.

Some respondents noted that the relatively short vendor clawback period (to the end of the tax year following disposal) can incentivise arrangements whereby a company is disposed of to an intended third party once the vendor is no longer exposed to any clawback charge. To reduce the attraction of such arrangements it was suggested that the vendor clawback period be extended.

Other respondents suggested that the EOT legislation should expressly confirm that disposals of shares to the EOT trustees must not made at above market value.

Some respondents noted that IHT implications may at present deter company owners from considering EOT ownership as part of an exit strategy upon retirement, as this would convert assets exempt from IHT (company shares) to assets that would be chargeable upon death. This deterrent, they said, is compounded by the fact that EOT sale proceeds are typically left outstanding for an extended period post-sale but would still be chargeable to IHT were the former owner to pass away before the consideration is received, leaving the estate with a dry tax charge to pay.

Some respondents noted the difficulties that EOT-owned companies can face in accessing external funding, as compared to the funding opportunities available to their non EOT-owned counterparts. Others suggested that the conditions imposed on EOTs should be relaxed to allow for internal corporate reorganisations without inadvertently triggering a ‘disqualifying event’ and a resulting tax charge on the trustees.

Many respondents noted a perceived ‘double taxation’ that occurs if an EOT-owned company is subsequently sold onwards to a third party, as the trustees would be liable to CGT on the disposal and would then distribute the net (after-tax) proceeds to the employees: the employees would then be charged income tax on their share of the net proceeds. It was felt that employees would perceive this as double taxation.

A number of responses were received from representatives of co-operative businesses, endorsing a collective response arguing that the tax reliefs available to incentivise EOTs should be extended to other employee-owned businesses such as worker co-operatives. Whilst these responses are outside of the scope of this consultation which focuses on the technical operation of the existing EOT reliefs, these responses have been noted and will be kept under consideration as part of future or ongoing reviews of this policy area.

Government response

The government is grateful for the extensive and constructive comments received in response to this question. The points raised, which will be kept under consideration, have helped inform the design of legislation being taken forward to reform the EOT tax regime.

The government recognises that the relatively short ‘vendor clawback period’ within which tax can be recovered from the former owner if the EOT conditions are breached post-sale may not encourage the vendor to take a long-term view of the future of the company. This undermines the policy intent of the EOT regime, which is to encourage employee ownership as a stable and long-lasting corporate structure. As such, the government will extend the ‘vendor clawback period’ during which tax can be recovered from the former owner if a disqualifying event occurs, to the end of the fourth year following the year of disposal. The period of time under which the tax can instead be recovered from the trustees (in the form of a deemed disposal and reacquisition) will correspondingly be shifted to start from the end of that fourth tax year following the date of disposal. These changes will apply to all disposals on or after 30 October 2024.

The government recognises that as the former owner is typically the driving force behind the disposal of their company to an EOT, some former owners may be tempted to structure the disposal to obtain an unfair benefit for themselves in the form of a disposal to the trustees at above the fair market value of their shares. To prevent this potential abuse of the relief, the government will introduce a requirement that, for a disposal to qualify for relief, the trustees must take all reasonable steps to ensure that the consideration paid to acquire the shares does not exceed the fair market value at the date of disposal. This change will apply to all disposals on or after 30 October 2024.

In addition to these changes, the government will also require former owners to provide additional information to HMRC at the point of claiming the CGT relief within their Self-Assessment Tax Return. For claims relating to the 2024 to 2025 tax year onwards, individuals must include within their claim: the consideration they have received for their shares, and the number of employees of the company at the date of disposal. This information will allow HMRC to better monitor and evaluate the relief.

Employee Benefit Trusts

The consultation also sought views on proposals relating to EBTs. An EBT is a trust which is set up by an employer to reward and motivate employees. Due to the technical nature of this section of the consultation, only a minority of respondents answered some or all of these questions.

Question 9: Do you have comments on the proposal to confirm the government’s position by making it explicit in legislation that the restrictions on connected persons benefiting from an EBT must apply for the lifetime of the trust?

23 respondents answered this question.

Nearly half of those who responded to this question noted that connected persons are already excluded from benefiting from an EBT and that the proposal will clarify this beyond doubt.

A couple of respondents were concerned with the rule itself given that trusts can last for a long time, so that for example, a great-grandchild could still be denied any benefit in the trust capital. A couple of respondents raised concerns about whether the rule strikes the right balance between preventing abuse of EBTs and allowing their use as genuine vehicles to incentivise employees.

Some respondents raised concerns about the practical application of the proposal, in particular if the trust is resettled or transferred into a new trust.

Government response

As set out in the consultation, the government agrees that connected persons are already excluded from benefiting from an EBT. The change to the legislation will put this point beyond doubt and reflect the original policy intent to reward and motivate a wide class of employees.

Question 10: Do you have any comments on the proposal to only allow the IHT exemption where the shares have been held for 2 years prior to settlement into an EBT?

22 respondents answered this question.

A minority of those who responded to this question were in favour of this proposal. A number of respondents expressed concern about the effect of a 2-year holding period, for example, on investors acquiring shares in a new holding company following a company reorganisation, on sole traders incorporating and new businesses wanting to incentivise employees quickly.

A few respondents expressed a view that the minimum holding period should be one year or there should be a requirement that the company is carrying on a genuine trade, with real employees. One respondent thought that introducing a minimum holding period for shares will conflict with the position for other assets (including cash) transferred into an EBT, which can (subject to relevant conditions being met) be transferred immediately without giving rise to an IHT charge.

A few respondents stated this change is unnecessary if the other 2 proposals are implemented.

Government response

The government notes the comments made regarding new businesses and sole traders incorporating and acknowledges the possible impact on share reorganisations The government agrees that the 2-year holding period should take account of shares previously held. This will ensure consistency with rules concerning Business Property Relief (BPR). Additionally the government notes that BPR may be available where businesses decide to restructure as long as the requirements for the relief are met.

A requirement will be added to the legislation for shares to be held for 2 years prior to settlement into an EBT. This provision will take into account shares held prior to any share reorganisation. This change will apply to transfers of value made to new and existing trusts on or after 30 October 2024.

Question 11: Do you have any comments on the proposal that no more than 25% of employees who are able to receive income payments should be connected to the participator in order for the EBT to benefit from favourable tax treatment?

20 respondents answered this question.

A third of those who responded to this question agreed with the proposal. Another third of the respondents made comments, for example raising concerns whether this additional restriction is necessary given that such individuals can only benefit to the extent that they are in receipt of income. A few respondents commented that this proposal may have unintended consequences and will be an issue for small companies using EBTs to facilitate share scheme arrangements, effectively excluding certain employees from participating in such arrangements.

Government response

For the existing exemption from IHT to apply, all or most employees need to be capable of benefiting from the EBT. The government notes concerns raised as to whether this change is needed because the individuals can only receive income The government intends to proceed with this change which will help to reinforce the original policy intent of rewarding and motivating a wide class of employees.

This change will require that no more than 25% of employees who are able to receive income payments should be connected to the participator and will apply to transfers of value to new and existing trusts on or after 30 October 2024.

Question 12: In addition to the reforms proposed at Chapter 7, do you have any views on ways the tax treatment of EBTs could be enhanced?

24 respondents answered this question.

Some respondents made comments related to IHT, for example noting concerns that the bonus issue of shares may result in an individual becoming a participator if the shares they hold represent 5% or more of the total shares. Others requested that government review the participator provisions in sections 13, 28 and 72 Inheritance Tax Act 1984 to determine whether these provisions are still appropriate, as it is increasingly common for companies to have more than one class of shares.

Other comments related to other taxes, for example to request the introduction of an exemption from transaction in securities rules for EBTs purchasing shares from shareholders (such as from a leaving shareholder) if the shares are to be used for the purposes of an employee share scheme within, say, 2 years. Others suggested that it would be beneficial to have an exemption from the loan to participator charge (section 455 CTA 2010) if a loan is made to an EBT which then uses the funds to purchase shares which are then used share-based awards within 2 years.

Government response

The government has considered the comments and reforms suggested. Whilst the government does not intend to make any additional changes at present, the comments received may be considered in any future reviews of EBTs.

4. Next steps

The government intends to proceed with the changes outlined above and legislation will be introduced in the Finance Bill 2024 to:

• restrict former owners or persons connected with former owners from retaining control of companies post-sale to an EOT by virtue of control (direct or indirect) of the EOT
• require that the trustees of an EOT must be UK resident (as a single body of persons) at the time of disposal to the EOT
• confirm in legislation that contributions made by a company to an EOT to repay the former owners for their shares will not be charged to Income Tax as a distribution
• ease the EOT income tax-free bonus provisions to allow bonuses to be awarded to employees without directors necessarily being included
• extend the period of time within which the relief can be withdrawn from the former owner if the EOT conditions are breached post-disposal, to the end of the fourth tax year following the tax year of disposal
• require that the trustees must take reasonable steps to ensure that the consideration paid to acquire the company shares does not exceed market value
• require that individuals provide within their claim for CGT relief information on the sale proceeds and the number of employees of the company at the time of disposal
• confirm in legislation that the restrictions on connected persons benefiting from an EBT must apply for the lifetime of the trust
• to only allow the IHT exemption where the shares have been held for 2 years prior to settlement into an EBT
• require that no more than 25% of employees who are able to receive income payments from an EBT should be connected to the participators of the company

In addition to these future legislative changes, in line with wider practice on anti-avoidance motive tests, HMRC will from 30 October 2024 onwards cease to provide clearances to companies and their advisers on the application of S464A CTA10 to a transaction to establish an EOT.

The changes outlined above are intended to ensure that the reliefs remain focused on the policy objectives of rewarding employees and encouraging employee engagement. The government will monitor the effectiveness of these reforms to ensure that the EOT and EBT reliefs represent good value for money and are not abused to obtain tax advantages contrary to the policy objectives. Future policy developments may be informed by the effectiveness of these reforms to prevent abuse.

The government will continue to consider the other issues and suggestions raised by respondents in response to this consultation. These views will help develop future policy in this area.

Annexe A: List of stakeholders consulted

Responses were received from 12 individuals and from the following organisations:

• ASC Financial Solutions
• Azets
• Baxendale
• BDO LLP
• BESTrustees
• Blackheath Products
• Calverts
• Chartered Accountants Ireland
• Chartered Institute of Taxation
• Christian Wilson Consulting
• Claritas Tax
• CMS Cameron McKenna Nabarro Olswang
• Common Knowledge
• Co-operatives UK
• Co-ownership Solutions
• Crowe UK
• Cwmpas
• DAC Beachcroft
• Deloitte
• Delta-T Devices
• Doyle Clayton
• DWF Law
• Ekonomska Demokracija (Slovenia)
• Employee Ownership Association
• Environet
• Ernst and Young
• ESOP Centre
• ESPL Regulatory Consulting
• Evelyn Partners
• Falco Construction
• Federation of Small Businesses
• Fieldfisher
• Fruit Works Co-operative
• FS Legal Solicitors
• Geldards
• Grant Thornton UK
• Greencity Wholefoods
• Hazlewoods
• Highland Wholefoods
• Indepdendent Directors & Trustees Ltd
• Institute of Chartered Accountants in England and Wales
• J Gadd Associates
• Jerba Campervans
• Jerroms Miller Specialist Tax
• John Lewis Partnership
• K3 Tax Advisory
• KPMG
• Leading Lives
• LEDA
• Lewis Silkin
• Link Group
• London Sociey of Chartered Accountants
• Luminate Ventures
• Matrix Science
• Mazars LLP
• Mischon de Reya
• Moore Kingston Smith
• National Center for Employee Ownership (USA)
• Osborne Clarke
• Ownership Associates
• People Support Co-op
• Postlethwaite Solicitors
• Principle 6
• PwC
• Pym & Wildsmith
• Quintessa
• Research for Action
• Riverford
• RM2 Corporate Finance
• RSM UK Tax
• Saffery
• Sankofa Therapy Cooperative
• Share Plan Lawyers
• Society of Trust and Estate Practicioners
• Stephens Scown
• Stir to Action
• Studio Skein
• Suma Wholefoods
• Tapestry Compliance
• The Eternal Business
• TLT
• Tripod
• United Agents
• Voluntary Action Harrow
• White Rose Centre for Employee Ownership
• Wrigleys