Budget 2024 and Employee Ownership Trusts (EOTs)

In the Autumn Budget, the Government announced a number of changes to employee ownership trusts (EOTs).

The changes come following a consultation on EOTs that took place between July and September 2023. The Government has now published its response to the consultation, announcing a raft of changes from restricting the control that former owners of the company can have on a sale to an EOT, to rules around Trustees of EOTs residing in the UK.

Jeremy Glover, one of the UK’s leading legal advisers on EOT transactions, explores what was announced and the effect this will have.

Control

After the sale of shares to the trustees of an EOT, the vendors will no longer be able to form the majority of the board of directors of the EOT.

We always advise this approach anyway. The majority should be made up of normal employees and independent directors. This is sensible governance but is now mandated under the new rules.

Market value

The EOT trustee must take reasonable steps to ensure that the amount paid for the company’s shares does not exceed market value.

At Jurit, we advise the trustee to insist that an independent valuation is obtained. In our view, this practice helps the EOT trustee to meet its trust law obligations but now this approach has been mandated.

Rules around the residence of trustees

Under the new rules, the EOT trustee must be UK resident. We would have suggested instead that the Government continues to allow overseas trustees, since many are fantastic administrators, but simply charge Capital Gains Tax (CGT) on disposals by them.

However, there is now a blanket restriction and, for new EOTs, the EOT trustee will now need to be UK resident.

Income tax-free bonuses

If companies wish to pay income tax-free bonuses, they can do so now to employees only, and directors can be excluded from receiving such bonuses.

Extension of vendor clawback period

Previously, if the company was sold within a period ending 12 months following the end of the tax year in which the EOT transaction occurred, there was a clawback so the sellers to the EOT would be subject to CGT.

This period has been extended to four years from the end of the tax year in which the EOT transaction occurred. This will inhibit quick sales after the EOT transaction.

What the changes to Employee Ownership Trusts will mean

EOTs are now an even more attractive business succession solution. Given the increase in CGT rates, and changes to Inheritance Tax (IHT) and Business Property Relief (BPR), we are likely to see far more of these transactions, which bring with them many benefits – both to the companies and their people.

Jurit is a market leading adviser on Employee Ownership Trust transactions, providing expert legal advice to business owners and shareholders on the options for the sale / succession options for their business, assessing whether employee ownership is the right solution for their business, or whether alternative forms of ownership would be optimal.

For help and advice on the transition to EOT status, get in touch.