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Between 18 July 2023 and 25 September 2023, a consultation was held seeking the views on targeted proposals in relation to the tax treatment of these trusts. The key principles in the suggested changes were to ensure that favourable tax treatment remains available to those who use EBTs and EOTs for the intended policy purposes, whilst preventing tax advantages being obtained through the use of these trusts outside of these intended purposes.
From 30 October 2024, the government has implemented the following changes to the EOT and EBT regime to:
- restrict former owners or persons connected with former owners from retaining control of companies’ post-sale to an EOT by virtue of control (direct or indirect) of the EOT
- require that the trustees of an EOT must be UK residents (as a single body of persons) at the time of disposal to the EOT
- confirm in legislation that contributions made by a company to an EOT to repay the former owners for their shares will not be charged to income tax as a distribution
- ease the EOT income tax-free bonus provisions to allow bonuses to be awarded to employees without directors being included
- extend the period of time within which the relief can be withdrawn from the former owner if the EOT conditions are breached post-disposal, to the end of the fourth tax year following the tax year of disposal
- require that the trustees must take reasonable steps to ensure that the consideration paid to acquire the company shares does not exceed market value
- require that individuals provide within their claim for Capital Gains Tax (CGT) relief information on the sale proceeds and the number of employees of the company at the time of disposal
- confirm in legislation that the restrictions on connected persons benefiting from an EBT must apply for the lifetime of the trust
- only allow the Inheritance Tax (IHT) exemption for EBTs where the shares have been held for 2 years prior to settlement into the EBT
- require that no more than 25% of employees who are able to receive income payments from an EBT should be connected to the participators of the company
In addition to these legislative changes, in line with wider practice on anti-avoidance motive tests, HMRC will from 30 October 2024 onwards cease to provide clearance to companies and their advisers on the application of section 464A Corporation Tax Act 2010 to a transaction to establish an EOT.
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Dawn MacDougall
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Bradley Johnston
Senior Manager
Jack Matson
Assistant Manager