Employee ownership rules will be tightened to combat tax abuse

The Ministers have proposed that employee trusts not be used to benefit employees but for tax purposes.

In July 2023, the previous government held a consultation. After the Budget, the responses were considered and new measures that aim to close tax loopholes while not being too restrictive to make it less attractive for businesses have been set forth.

Employee trusts can be set up to benefit the employees of a business or the office holders. These are commonly referred to for tax purposes as employee benefit trusts. Employee ownership trusts are a type of EBT in which the trustees control the company and own it for all employees’ benefit.

The Chartered Institute of Taxation has pointed out, among other bodies, that in some cases such trusts are promoted as a way for business owners to save money on taxes. They can sell their companies to EOTs or EBTs and not pay capital gains tax. This is done without the intention that employees will own and control the company.

Christopher Thorpe is a technical officer at the CIOT. He said during the consultation last year: “We are concerned about preventing abuse and ensuring that the EOTs fulfill their original intent and sentiment. The former owner may be eligible for CGT relief when creating the settlement. However, the only benefit to employees is the PS3,600 tax-free bonus.

Tax reliefs introduced in 2014 give EOTs a tax-favoured status.

Both the previous government as well as the current Labour administration has sought to ensure the tax benefits remain available for those who use EBTs or EOTs to achieve the policy goals intended, and to prevent tax advantages from being gained by using these trusts in ways other than intended.

The proposed changes, which will be included in the Finance Bill of 2020, will restrict former owners’ ability to retain control of their companies after a sale to an EOT, by virtue of controlling the EOT.

The trustees of an EOT must also be UK residents when the EOT is sold.

The government will also extend the period within which the relief may be withdrawn from a former owner in the event that the EOT conditions have been breached after the sale, until the end of fourth tax year following tax year of disposal.

Trustees will also be required to take reasonable steps to ensure the price paid for the shares of the company does not exceed the market value. The new legislation will also stipulate that not more than 25 percent of employees eligible to receive EBT income payments are connected to company participants.

Ministers have said they will monitor these reforms in order to make sure that EOT and EBT are not being abused for tax benefits contrary to policy objectives. The effectiveness of reforms in preventing abuse may inform future policy development.

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