BUDGET 2024: Trimming the fluff and the baggage – EOTs and EBTs
Andy Wood • November 1, 2024
BUDGET 2024: Trimming the fluff and the baggage – EOTs and EBTs
It seems odd to group these things together.
Employee Ownership Trusts are warm and fluffy. Encouraged by government to increase employee ownership. A cynic might say loved by business owners looking for a tax efficient exit.
Whereas Employee Benefit Trusts are the thing of nightmares. They carry more baggage than an average Swissport employee.
But they are very much cut from the same cloth.
Budget 2024 announced restrictions in the application of both.
Let’s take a butchers.
Employee Ownership Trusts (“EOTs”)
What is an EOT?
Employee Ownership Trusts (EOTs) were introduced under the Finance Act 2014 to promote indirect employee ownership by allowing employees to collectively own shares through a trust.
In theory, this model incentivises employees by enabling them to benefit from the company’s success, which can enhance employee motivation, retention, and overall company growth.
In addition, and of interest to the business owner, EOTs come with specific tax reliefs: capital gains tax (CGT) relief on share disposals, inheritance tax (IHT) relief, and income tax relief on employee bonuses.
The CGT relief allows owners to transfer a controlling share (over 50%) of their business into an EOT without triggering CGT, provided the company meets certain conditions, such as being actively trading and equally benefiting all employees.
It is not an exemption, but a form of holdover relief. Meaning the trustees essentially pick up the tab for the historic gain when they come to sell.
IHT relief is also available for shares transferred into an EOT, making it exempt from charges typically associated with trusts. With the restrictions to BPR announced in the Budget, this might become more attractive for new EOTs going forward.
Additionally, employees of EOT-owned companies can receive annual bonuses up to £3,600 tax-free. regulations, professional advice is recommended for companies considering this structure.
The changes to EOTs in summary
The Chartered Institute of Taxation, for some reason, has had a bee in its bonnet about EOTs for the last few years and it might be said these changes are, at least in part, down to their lobbying.
- Control: There will be a restriction on former owners (and those connected with them) from retaining control of companies' post-sale to the EOT by virtue of control (direct or indirect) of the Trust. This will be a problem for vendors who want to control from beyond the sale.
- Trustees must be UK resident: This means that the trustees cannot benefit from a tax-free eventual sale by being non-resident. As such, this ensures that the CGT relief is merely a deferral and not avoidance. The trustees will pick up the tab which will, ultimately, be borne by the employee beneficiaries.
- Fair market value consideration: the trustees must take reasonable steps to ensure that the consideration paid to acquire the company shares does not exceed market value. I am amazed that trustees are not already doing this.
- Clawback period extended: the ‘vendor clawback period’ if the Employee Ownership Trust conditions are breached post-sale, will now not end until the fourth tax year following the end of the tax year of disposal
- Reporting: the claim for CGT relief must include details of the sale proceeds and the number of employees of the company at the time of disposal
- Income tax distributions: Legislation will clarify that certain payments, including where the company makes payments to the trustees to repay consideration left outstanding to the vendors, is not taxed as a distribution.
The changes had immediate effect (e.g. for disposals to the EOT from 30 October 2024 onwards).
Employee Benefit Trusts (“EBTs”)
Introduction
Darkness descends. A wolf howls in the distance. A shiver runs down your spine. Yes, its EBTs folks.
However, despite their use for PAYE and corporation tax, EBTs have remained interesting for capital tax planning reasons – whether for IHT purposes of CGT purposes.
The shares in a genuine business (note, not necessarily trading) could be transferred to an EBT (without the bells and whistles of the EOT) without it being a transfer of value and without an immediate CGT charge where certain conditions were satisfied. These conditions being less onerous than the EOT.
Again, with the curtailing of BPR and BADR, they will remain so in the future. However, one will need to be more and more careful, and the scenarios they will be appropriate have probably reduced somewhat as a result of the Budget.
Let’s take a peep… from behind the sofa.
The Budget 2024 changes
The changes can be summarised as follows:
- ensure that the restrictions on connected persons benefiting from an Employee Benefit Trust must apply for the lifetime of the trust
- restrict the Inheritance Tax exemption to where the shares have been held for two years prior to settlement into an Employee Benefit Trust — where there has been a share reorganisation, the shares previously held will be taken into account in considering the two-year holding period
- ensure that no more than 25% of employees who can receive income payments should be connected to the participator in order for the Employee Benefit Trust to benefit from favourable tax treatment
The first of these is unlikely to be a problem – other than for pretty egregious planning which has already been fingered by the GAAR Advisory Panel.
You could probably say the same about the second one.
The third may have more practical reasons and is likely to mean that EBTs, for these purposes, will have to be used for businesses which have, and are prepared to benefit, a more diverse cohort of employee beneficiaries.
For over two centuries, the UK’s non-domiciled tax regime and its remittance basis has been a cornerstone of tax planning for wealthy expats and international families. It was introduced, along with income tax, by Willian Pitt the Younger at the very end of the 18th century. It was part of the fiscal firepower necessary to battle Napoleon Bonaparte. And, like income tax, it had pretty much been a constant feature of the UK’s system ever since. But in March 2024, the then Chancellor, Jeremy Hunt, rang the death knell for the remittance basis, with Labour’s Rachel Reeves – who would succeed Hunt a few months later - declaring she would have abolished it anyway. The end is therefore very much nigh for the UK’s non-dom tax regime. More specifically, the end is 6 April 2025. However, out with the old and in with the new’ goes the saying. As such, the ‘what comes next’ will reshape the tax landscape for non-doms, expats, and international investors with a UK footprint (or those considering creating one). What is Domicile (and Non-Domicile)? Domicile is not a straightforward concept like tax residence. The latter is largely about physical presence (or otherwise) in a particular. Instead, as well as physical presence, it also requires an understanding of your future intentions. Is a place somewhere that you intend to live permanently or indefinitely. There are two main types of domicile that I will discuss here: • Domicile of origin: This is inherited at birth, usually from your father (if you think that is misogynistic then I don’t make the rules, OK?). You do not lose your domicile of origin. However, think of it as the foundations of a building. You can a domicile of choice on top it. • Domicile of choice: You build a new domicile of choice by achieving two things. Firstly, by physically residing in place and, secondly, by forming the intention to stay in that same place permanently or indefinitely. Both must be present.
So you’ve left the UK for pastures new. The sun is shining. You're making more money. You’re enjoying a great quality of life in a new country. In fact, you’re totally de-mob happy. Even better, as a non-UK resident, UK taxes are a dim and distant unpleasant memory, right. Right? Wrong. I don’t necessarily see my role in life as chief balloon popper. However, there are some Uk tax things you should bear in mind before declaring yourself a tax exile. Am I really non-UK Resident (“NR”)? Up until 2013, the UK didn’t really have a statutory definition of residence for tax purposes. Yes, that’s as crazy as it sounds. Fortunately, the Statutory Residence Test (“SRT”) was introduced from 2013. The idea is that it provides a degree of objectivity through a series of tests. Although a statutory test, other than in straightforward cases, it can still remain complex.
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