Consultation on Employee Ownership Trusts and Employee Benefit Trusts

July 26, 2023

Further to its announcement in April this year, on Tuesday 18 July 2023, the Government launched its consultation, seeking views, mainly from individuals, trustees and tax practitioners on proposals for reforms on targeted taxation aspects of Employee Ownership Trusts (EOTs) and Employee Benefit Trusts (EBTs). Further details can be found here.

By way of an introduction, an EBT is a discretionary trust established by an employer company for the benefit of the employees of the company/group. EBTs may be set up for many purposes, for example to facilitate the holding of shares by employees, to provide employees with benefits such as health cover, etc. Provided certain conditions are satisfied, EBTs enjoy certain tax advantages, especially in relation to inheritance tax (IHT).

Introduced in 2014, an EOT is a type of EBT through which a company/group is owned by trustees, who exercise control of the company for the benefit of all employees. EOTs are given tax-favoured treatment through tax reliefs. Moreover, tax benefits are also provided to the sellers of shares to EOTs.

The Government is consulting on proposals to:

  • ensure that the tax reliefs associated with EOTs meet the policy objectives underpinning those reliefs
  • reform the IHT treatment for EBTs

whilst preventing tax advantages being obtained through the use of EBTs and EOTs outside their intended purposes.

The consultation is seeking comments on the following proposals:

  • the former owners and their connected persons should not retain control of an EOT-owned company post-sale by appointing themselves to constitute more than half of the board of trustees
  • the EOT trustees should include persons drawn from specific groups, such as employees or independent persons
  • the EOT trustees should be UK resident as a single body of persons
  • confirmation by legislation that contributions made by a company to an EOT to pay the former owners for their shares will not be taxed as distributions
  • HMRC to stop giving clearances on the application in respect of company contributions to EOTs not being treated as distributions
  • EOT bonus rules to be eased so that tax-free bonuses can be awarded to employees without directors necessarily also having to be included
  • EOT bonus rules should not create any other unintended consequences or challenges in administering any tax-free bonus payments
  • suggestions for other ways to reform the EOT regime to better support employee ownership
  • legislation to expressly restrict connected persons benefiting from EBTs during the lifetime of the trust
  • exemption from IHT where shares have been held for two years prior to settlement into an EBT
  • no more than 25% of employees who are able to receive income payments should be connected to the participator (mainly shareholders) in order for the EBT to benefit from favourable tax treatment
  • seeking views on ways the tax treatment of EBTs could be enhanced

The consultation will close on 25 September 2023.

For further information, please contact JD Ghosh or Stuart James or Paul Norris.

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