The UK Budget 2024 introduces reforms to Employee Ownership Trusts (EOTs) with important implications for business owners considering transitioning their companies into employee-owned models.

Loss of Control Post-Sale: Owners or connected parties cannot retain control over the EOT after the sale, directly or indirectly. This change reinforces the independence of the EOT and aligns it with the principle of genuine employee ownership. For owners, this means they must be prepared to relinquish control and influence, a shift that could impact succession plans if family members or trusted associates were expected to retain significant involvement​. To meet the relief requirements, excluded participators (including the vendors) must (i) represent fewer than 50% of the trustees or trustee directors and (ii) must not have control* (per ss450/451 CTA 2010) of the trust.

Requirement for UK-Resident Trustees: The Budget mandates that the body of trustees must be UK resident at the time of the transfer and, to avoid a clawback charge, at all times thereafter. This requirement ensures future capital gains tax (CGT) liabilities, if any, are taxed within the UK. The inclusion, amongst a body of trustees, of one non-resident services provider will not mean that the trustees are non-UK resident.

Market Value Verification: It is now a relief requirement that trustees must take all reasonable steps to secure that the consideration for the disposal of shares to the EOT does not exceed the market value of those shares, and any interest on deferred payments of consideration does not exceed a reasonable commercial rate. This implies a need for trustees to secure an independent valuation of the shares to be acquired.

Additional reporting obligations: claims for relief from CGT upon a disposal of a controlling interest to an EOT must now include details of the number of employees and of the consideration for the disposal (both immediate and deferred). If the number of employees cannot be ascertained the claimant must at least demonstrate that he or she has taken all reasonable steps to ascertain that number.

Extended Clawback Period for CGT Relief: The period in which the vendors will forfeit their relief from CGT upon the occurrence of a disqualifying event is extended to four tax years next following that in which the disposal is made. This places an extended period of risk for owners, as their tax relief is contingent there being no disqualifying event before the end of an additional three years beyond the original timeframe​. Careful thought is needed as to how vendors may protect themselves against the occurrence of a disqualifying event, something over which, if brought about by actions of the trustees and/or the company, they may have no control.

Bonus Distribution Flexibility: While the EOT structure allows for tax-free bonuses of up to £3,600 for employees, owners now have the option to exclude directors from this bonus distribution. This provides a welcome flexibility.

Confirmation of the tax treatment of company distributions to the EOT: the legislative changes now provide that distributions by the EOT-owned company to the EOT which would be chargeable to income tax in the hands of the trustee(s) may, upon making a claim to HMRC, be reduced in amount by the trustees’ costs of acquisition of the shares (including interest at up to a reasonable commercial rate on deferred consideration and stamp duty/SDRT on the share purchases by the trustees). It remains an interesting question as to whether, if the EOT holds less than 100% of the issued share capital, contributions made to the EOT are properly to be treated as distributions in respect of shares in the first place. It remains a requirement of company laws that payments made to the EOT must be made from distributable reserves of the company.​

Implications: Overall, these reforms aim to curb tax-driven EOT arrangements, ensure that employee ownership is substantive, and clarify EOT governance. For owners, the changes may mean greater administrative requirements and reduced control but still offer a tax-efficient exit route. With increased CGT rates on standard business sales, EOTs remain attractive, though the process has more safeguards to ensure genuine employee ownership rather than solely tax benefits​.

*Excluded participators are treated as having control if they have power (under trust deed, or by law to: Deal with trust property; vary or terminate the settlement; add or remove beneficiaries; appoint or remove trustees or give a third-party control of the EOT; direct the exercise of any such power.

Many thanks to David Pett of Temple Tax Chambers for his comments and guidance.