EOTs post Budget – business as usual!

On Budget Day, the government published its response to a recent consultation on Employee Ownership Trusts (EOTs) and Employee Benefit Trusts (EBTs), as well as amending legislation.

RM2 is delighted to say that the changes will make little or no difference to our approach to establishing EOTs for our clients.  Importantly there are no retrospective changes for EOTs established before 30 October 2024.

“Best practice” amendments

Some of the amendments simply put what is existing best practice into law:

  • After the transaction, sellers will not be able to form a majority of EOT trustees.  This is to ensure that, after the sale, the vendors cannot indirectly control the business by virtue of their trusteeship.  RM2 has always advised this structure for the trust board to ensure best practice governance. Importantly, there is no requirement to have an independent trustee on the board which would reduce flexibility, and increase costs, for many smaller companies.
  • The EOT trustee (as a single body) must be UK resident, not located offshore.  RM2 has never established an EOT with offshore trustees.
  • The EOT trustees must take reasonable steps to ensure that the amount paid for the company’s shares does not exceed market value.  RM2 ensures that EOT trustees are provided with a robust independent valuation prior to completion of any transaction.

Another amendment confirms in legislation what is already informally accepted by HMRC – that capital payments made by the EOT to the sellers for their shares will not be charged to income tax as a distribution.  It is helpful to have this set out unequivocally in the legislation, and will streamline the process as HMRC clearance is no longer required in advance of an EOT transaction.

Income tax-free bonuses

One minor amendment creates some flexibility regarding the payment of income tax-free bonuses.  If companies wish to do so these payments can now be limited to employees only, and directors can be excluded from receiving such bonuses. 

Extension of vendor clawback period

There is one potentially important change which may be viewed with more circumspection by vendors. In general this is an anti-avoidance measure designed to stop vendors selling to an EOT achieving a capital gains tax free sale, and then selling the business on again within a short period. 

Before the Budget, if there is a breach of the EOT conditions after the transaction (for example, if the company is sold on), relief is withdrawn from the sellers but only within a period ending 12 months following the end of the tax year in which the transaction occurred (so for an EOT transaction completed on 15 October 2024 that period would end on 5 April 2025). 

That period is now extended to 4 years from the end of the tax year in which the transaction occurred (so for an EOT transaction completing on 15 November 2024 that period would end on 5 April 2029).  While this is probably unhelpful for sellers, it does provide some protection for the trustee (and, hence, the employees) should the EOT come to an end only a couple of years after the sale to the EOT.

That said, EOTs remain a very attractive business succession solution from a tax and operational perspective, particularly given the increase in capital gains tax rates, and changes to Inheritance Tax and Business Property Relief.

If you’d like to discuss the use of an EOT in your business please email us on enquiries@rm2.co.uk and one of our expert advisers will be happy to arrange a call with you.