Introduction
The October 2024 Budget, delivered by Chancellor Rachel Reeves, introduced a host of new tax regulations affecting UK businesses. While the increase in employer’s National Insurance Contributions (NICs) and adjustments to capital gains tax (CGT) rates have dominated the headlines, a significant portion of the Budget focused on Employee Ownership Trusts (EOTs). EOTs allow business owners to sell shares to employees in a tax-efficient manner and have grown in popularity as a strategic exit route. The recent changes aim to ensure EOTs are used to genuinely support staff ownership rather than merely a tax haven.
For business owners considering an EOT, these updates bring both new opportunities and additional compliance requirements. Below, we’ll explore some of the major Budget changes impacting EOTs, what they mean for business owners, and the ways in which our team can support clients in navigating these changes effectively.
Major Changes
UK Trustee Residency Requirement
A core change introduced by the Budget is the new requirement for EOT trustees to be UK resident. Previously, non-UK trustees allowed businesses to avoid UK CGT liabilities in cases of “disqualifying events”, such as when trustees lose control of the trust or shift ownership to a non-employee entity. Under the new regulations, the involvement of non-UK trustees is no longer permitted, ensuring that any CGT liability triggered by such events will remain within the UK tax system.
Trustee Independence Requirement
To avoid conflicts of interest, the new regulations require that at least 50% of the trustees must not be “excluded participators”. This means they cannot be individuals with direct financial interests in the business such as founders, family members, and senior managers. This measure is designed to ensure that EOTs are genuinely set up for employee benefit, not a vehicle for former owners or those with vested interest to maintain control.
Fair Market Valuation
To prevent artificially inflated or deflated share valuations, the Budget now requires trustees to ensure that shares transferred to the EOT are priced at fair market value. Additionally, if the EOT purchases shares on a deferred payment basis, the interest rate on these payments must be commercially reasonable. These requirements are intended to ensure fair valuation for the benefit of employees and to prevent arrangements that could manipulate tax or financial outcomes.
Disqualifying Events
The Budget has extended the “fall-back” period for tax liability on disqualifying events, such as when trustees lose control of the EOT, from one to four tax years. Under this rule, should a disqualifying event occur within four years of the sale, the original seller may be liable for any resulting tax liabilities. This measure aims to prevent short term sales to an EOT for tax relief purposes before selling to a third party buyer, shortly after thus, ensuring that EOTs remain committed to long term employee ownership.
How FSP Can Help
EOTs have become increasingly popular as an exit route in the last few years. There are now about 1,400 private companies being owned by the end of 2023 and FSP has advised on a number of such exits.
The October 2024 Budget has introduced important updates to EOTs, reinforcing their value as genuine employee ownership vehicles while increasing compliance obligations for business owners. Although these changes add complexity, an EOT remains an attractive, tax-efficient option that aligns with long-term employee engagement goals.
Business owners will need to carefully consider who is appointed as a trustee to ensure compliance with these new tax laws. A balanced trustee board with independent, UK resident members is required. They will also need to conduct accurate market valuations, supported by credible valuation methods. Our team is well equipped to support clients through this process.
Our team can work with you to determine whether an EOT is the right fit for your business, taking into account your goals, tax implications, and employee ownership objectives. Our goal is to provide business owners with seamless, compliant transitions, helping you navigate the latest regulatory requirements with clarity and confidence. Whether you’re just beginning to explore an EOT or need guidance to adapt the new rules, contact us to learn how we can help your business transition smoothly to an EOT structure that maximises benefits for both you and your employees.
Article contributor: Lola Babalola, Paralegal, Corporate
