Capital Gains Tax (CGT) and relief changes: How do these relate to EOTs?
The Autumn Budget 2024 saw CGT rates rise to 18% and 24% with effect from 30 October 2024, up from 10% and 20% for lower and higher rate taxpayers, respectively. There are also phased changes to Business Asset Disposal Relief (BADR), it remains at 10% until April 2025 and will increase to 14% for disposals made on or after 6 April 2025 and 18% of disposals made on or after 6 April 2026.
BADR is available on qualifying capital gains arising on disposals of certain assets, including shares in trading companies, provided the shares have been held for two years before disposal, the seller has been an officer or employee of the company and holds at least 5% of the ordinary share capital. There is a £1 million cumulative lifetime limit for disposals on or after 11 March 2020.
With the CGT rates on a sale to an Employee Ownership Trust (EOT) being 0%, these increases in CGT rates might mean that EOTs are more attractive compared with a traditional sale.
Such generous tax relief, while attractive, is not the only consideration when contemplating an EOT. It will be important to consider:
- The future profitability of your company, since the purchase price tends to be funded from future company profits over quite a long period of time (five to 10 years) and be able to fund growth.
- Whether your employees are ready for the transition, to ensure the company can sustain or grow its profitability.
- Whether you are ready to hand over control of your business to the EOT. While a selling shareholder may continue to work in the business and sit on the board of the EOT and the company, they will not be able to form a majority on the board of the trust, and the trust will have ultimate control of your company.
EOTs – What has changed?
During the Budget, the Government also announced changes to EOT legislation, following a consultation in 2023, but these are unlikely to impact EOTs greatly, with many of the practices that have been tightened up already being followed; that is certainly the case for the EOTs we at Tees have been advising on. The changes apply from 30 October 2024.
The announced changes:
- Ensure that former owners (and persons connected with them) cannot retain control of the company post-sale by retaining control of the EOT.
- Require that the trustees of the EOT are UK residents at the time of disposal to the EOT
- Require the EOT trustee to take reasonable steps to ensure that the price paid for the company’s shares do not exceed market value.
- Requires individuals to provide additional information to HMRC at the point of claiming the relief.
- An increase to the timeframe within which relief can be withdrawn from the selling shareholders if there is a disqualifying event (i.e. a breach of the EOT conditions) post-disposal, extending it from the end of the first tax year to the end of the fourth tax year following disposal.
- Makes a small adjustment to the conditions for obtaining Income Tax relief on annual bonuses made to employees of EOT owned companies, to allow for directors to be excluded from the bonus award.
- Provides legislative certainty over the distributions tax treatment of contributions paid to the trustees of an EOT to repay the former owner for their shares, by introducing a specific relief which covers such contributions, which should mean fewer HMRC clearance applications relating to EOT transfers.
Are EOTs worth considering?
With the imminent changes in CGT, and the EOT legislative structure remaining aligned with current practice, EOTs are an attractive solution for addressing succession in some businesses. The interest in EOTs has increased in recent years, with many seeing them as a viable option that benefits their company and themselves, and we expect that trend to accelerate.
Tees Law have the expertise and experience to assist shareholders with the transfer to an EOT, protecting their interests by ensuring the documentation meets the legislative requirements and protects against the occurrence of disqualifying events.
How can we help?
If you are considering your options for succession planning, Tees Law has a large team that can advise you on all aspects of business succession planning, including EOTs and other employee benefit trusts. Please get in touch with Tracey Dickens or Lucy Folley, who will be pleased to assist you.
