Employee Ownership Trusts (EOTs) are trusts which have been set up for the benefit of all of the employees of a business, with a controlling shareholding in a company owned by the trustees. It is often said that companies owned by EOTs are owned and operated by their employees for their employees’ benefit.

To encourage the formation of EOTs, generous tax reliefs have been implemented, with a key feature being an exemption from Capital Gains Tax (CGT) on any gain on the sale of shares in the company to the EOT.

Whilst there are strict criteria which must be met for an EOT’s formation, these rules are being further tightened following the Autumn 2024 Budget.

The government has proposed new rules intended to prevent the previous owners of companies continuing to control them, directly or indirectly, following a sale to an EOT, and implementing stricter reporting requirements at the point of sale, as well as a requirement for the EOT to be fully UK resident.

However, the most significant changes relate to the CGT reliefs provided to sellers.

Firstly, whilst there has always been a requirement that shares in a company sold to an EOT must be sold at market value, to avoid inflating any CGT-exempt gain, there is a proposed new obligation on the EOT trustees to ‘take all reasonable steps’ to ensure that market value is paid.

Secondly, and most significantly, EOTs and the companies they own must meet several strict criteria in order for the sellers to qualify for CGT exemptions: prior to the budget, these criteria were required to remain in place until the tax year after the sale to the EOT occurred, otherwise any claims for CGT relief would be clawed-back, and tax would have to be paid on the disposals.

Following publication of the proposed legal changes with the Budget on 30 October 2024, these criteria must now remain in place for the four tax years after the tax year in which the disposal occurred for any disposals made after 30 October 2024.

There are also proposed amendments to income tax rules, primarily ratifying in legislation the current accepted tax treatment of EOT trustees which provides some reliefs from income tax when acquiring the shares in the company, including reliefs applying to the consideration paid, any interest on deferred payments and any stamp duty payable.

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The proposed changes following the Autumn 2024 Budget highlight the importance of understanding the new legal requirements and tax implications associated with EOTs. By doing so, businesses can ensure they are fully compliant and continue to reap the benefits of employee ownership. If you are considering transitioning to an EOT or need guidance on navigating these changes, now is the time to seek expert advice. Get in touch with our team today to explore how EOTs can benefit your business and secure a prosperous future for your employees.