Introduction

Towards the end of last year the Chartered Institute of Taxation (CIOT) made submissions to the Government about the future direction of Employee Ownership Trusts (EOTs). To read the full submission click here. The aim of this article is to summarise the key points.

Summary

Simplifying the Admin – Strictly speaking, the payment of company profit up to the EOT to pay the former owner is a company distribution and is taxable in the hands of the trustees. This was a pure oversight when the legislation was written and HMRC say they won’t enforce it. Founders selling to an EOT nonetheless get clearance from HMRC to be absolutely sure – which to date HMRC almost always grant unless the value of the company is completely unreasonable. The Chartered Institute are asking for this to be put it in legislation to save everyone time. Seems like a no brainer to be honest.

Offshore Trustees – Again, strictly speaking, by having offshore trustees the EOT can get away with paying no CGT if they go on to sell to a third party. CIOT recommend insisting trustees be UK based or having some kind of reserve liability on employees or the seller to ensure CGT isn’t avoided. This also seems reasonable to me although I can see practical challenges if the Founder is looking to retire abroad, and remain a trustees, and/or if certain members of staff work remotely abroad and may wish to be employee trustees. Of course the other options, raised by David Pett in his recent book would be set a limit on the CGT clawback allowing even UK based trustees to sell without fiscal penalty provided a certain number of years have expired. This would clearly significantly increase the benefit to employees of being in an EOT.

Composition of the Board – At the moment you could have just one trustee: the seller. CIOT argue though that this isn’t really in the spirit of employee ownership. They are suggesting that while the seller can be a trustee they should not command a majority of the trust.

Inheritance Tax Relief – If you sell a company you convert an asset which would qualify for Business Property Relief (BPR) into cash which doesn’t. That’s not such a big deal with conventional sales since you get the cash upfront and can either spend/invest it, give it away or start other planning exercises. With EOTs though, the deferred consideration could take many years to reach the seller. As such it’s riskier particularly for sellers who are slightly older. CIOT are recommending that the Government consider extending BPR for deferred EOT consideration up to 10 years. If this happens it would make an EOT sales even more attractive.

Reporting – Finally, they recommend a specific box in Personal Tax Returns where people can claim CGT exemption for EOT sales. Doing this would help HMRC track how many EOT sales are taking place each year and provide helpful analytic data.

It’s encouraging to see continued interest in the concept of Employee Ownership Trusts within the profession as well as practical suggestions on how to improve the regime. If you’d like to discuss the future of Employee Ownership Trusts, or if you’re considering selling into one, please do not hesitate to contact us at tax@thepeloton.co.uk or by calling our office on 01326 660022.