Policy paper

Taxation of Employee Ownership Trusts and Employee Benefit Trusts

Updated 6 November 2024

Who is likely to be affected

Individuals and trustees who dispose of shares to the trustees of an Employee Ownership Trust. Employees of companies controlled by Employee Ownership Trusts, or employees of a company within a group controlled by an Employee Ownership Trust.

Individuals who settle property into Employee Benefit Trusts, or who are trustees or beneficiaries of such trusts.

General description of the measure

This measure:

• makes changes to the conditions for obtaining relief from Capital Gains Tax on disposal of a controlling shareholding in a company to the trustees of an Employee Ownership Trust — these changes will:
  • ensure that former owners cannot retain control of the company post-sale by retaining control of the Employee Ownership Trust
  • require that the trustees of a qualifying Employee Ownership Trust be UK resident as a single body of persons
  • require that reasonable steps are taken to ensure that the consideration paid on disposal of shares to the trustees does not exceed market value
• requires individuals to provide additional information to HMRC at the point of claiming the relief, and also increases the period of time within which relief can be withdrawn from the individual if the Employee Ownership Trust conditions are breached post-disposal
• provides legislative certainty over the distributions tax treatment of contributions paid to the trustees of an Employee Ownership Trust in order to repay the former owner for their shares, by introducing a specific relief which covers such contributions
• makes a small adjustment to the conditions for obtaining Income Tax relief on annual bonuses made to employees of Employee Ownership Trust owned companies, to allow for directors to be excluded from the bonus award
• makes 3 changes to the conditions that need to be met for a transfer into an Employee Benefit Trust to be exempt from Inheritance Tax

Policy objective

The overall policy objective of the Employee Ownership Trust tax regime is to incentivise and support employee ownership as a viable and sustainable business model. Employee ownership gives employees a greater stake in the business in which they work, improving working conditions and driving productivity and growth in the economy.

This measure makes a range of targeted reforms to the Employee Ownership Trust tax reliefs to ensure that the reliefs remain focused on the intended purpose of encouraging and supporting employee ownership, whilst preventing opportunities for the reliefs to be abused to obtain tax advantages outside of these intended purposes.

The policy objective of exempting transfers of value to Employee Benefit Trusts from Inheritance Tax is to encourage businesses to reward and motivate a wide range of their employees. To qualify for the exemption, there are conditions that need to be met. These conditions ensure that Employee Benefit Trusts set up to only benefit a narrow class of employees do not receive preferential tax treatment. The changes made by this measure will help to ensure the tax treatment of Employee Benefit Trusts is consistent with the original policy intent.

Background to the measure

An Employee Benefit Trust is a trust set up for the benefit of employees of a company.

An Employee Ownership Trust is a specific type of Employee Benefit Trust whereby a controlling shareholding in a company is owned by a trust specifically set up for that purpose. The trustees of the Employee Ownership Trust are required to exercise their control of the company for the benefit of all the employees. A package of tax reliefs was introduced in the Finance Act 2014 to incentivise company owners to transition their companies to Employee Ownership Trust ownership.

At Tax Administration and Maintenance Day 2023 the then government announced that a consultation would be held on the use and effectiveness of the Employee Ownership Trust and Employee Benefit Trust tax regimes, to ensure that the reliefs remain focused on the targeted objectives of rewarding employees and encouraging employee engagement, whilst preventing opportunities for unintended tax planning.

A consultation document, Taxation of Employee Ownership Trusts and Employee Benefit Trusts was published on 18 July 2023, seeking views on a range of proposals to reform the Employee Ownership Trust and Employee Benefit Trust tax regimes. The consultation closed on 25 September 2023. The Government’s response to this consultation, Taxation of Employee Ownership Trusts and Employee Benefit Trusts: Summary of Responses was published at Autumn Budget 2024.

Detailed proposal

Operative date

The changes to the Employee Ownership Trust Capital Gains Tax relief conditions will have effect for disposals made to the trustees of an Employee Ownership Trust on or after 30 October 2024. The changes to the Capital Gains Tax claim conditions will have effect for claims made for the tax year 2024 to 2025 onwards.

The confirmation of the tax treatment for contributions made to an Employee Ownership Trust to repay the former owner and the changes to the Income Tax relief conditions for annual bonus payments to employees of Employee Ownership Trust controlled companies will have effect from 30 October 2024.

The changes to the Employee Benefit Trust Inheritance Tax regime will have effect from 30 October 2024.

Current law

The main Employee Ownership Trust Capital Gains Tax provisions are set out at sections 236H to 236U of the Taxation of Chargeable Gains Act 1992.

Provisions relating to the Income Tax annual bonus relief and other provisions relevant to Employee Ownership Trusts are set out at sections 312A to 312I of the Income Tax (Earnings and Pensions Act) 2003, that is, section 383 of the Income Tax (Trading and Other Income) Act 2005 and sections 464A and 1000 of the Corporation Tax Act 2010.

Provisions relating to the Inheritance Tax treatment of Employee Benefit Trusts and Employee Ownership Trusts are set out at sections 13, 13A 28, 28A, 72, 75 and 86 of the Inheritance Tax Act 1984.

Proposed revisions

Legislation will be introduced in Finance Bill 2024-25 amending sections 236H to 236U of the Taxation of Chargeable Gains Act 1992 to:

• restrict former owners or persons connected with former owners from retaining control of companies post-sale to an Employee Ownership Trust by virtue of control (direct or indirect) of the Employee Ownership Trust
• require that the trustees of an Employee Ownership Trust must be UK resident (as a single body of persons) at the time of disposal to the Employee Ownership Trust
• require that the trustees must take reasonable steps to ensure that the consideration paid to acquire the company shares does not exceed market value
• extend the ‘vendor clawback period’ at sections 236O and 236R, within which the tax relieved can be recovered from the vendor if the Employee Ownership Trust conditions are breached post-sale, to the end of the fourth tax year following the end of the tax year of disposal
• require that individuals provide within their claim for Capital Gains Tax relief information on the sale proceeds and the number of employees of the company at the time of disposal

Legislation introduced in Finance Bill 2024-25 will amend Chapter 3 of Part 4 of Income Tax (Trading and Other Income) Act 2005 to introduce a new relief from the Income Tax Distributions regime. This relief will apply to contributions paid to the trustees of an Employee Ownership Trust to fund costs associated with setting up the Employee Ownership Trust, including consideration that is then repaid to the former owners in return for their shares, and contributions to cover associated costs such as stamp duty and interest paid at a reasonable commercial rate. This will give legislative confirmation of the treatment that is currently routinely confirmed through clearance applications.

Legislation introduced in Finance Bill 2024-25 will amend section 312C of Income Tax (Earnings and Pensions Act) 2003 to allow for the exclusions of directors from the ‘participation requirement’ for the purposes of determining whether Income Tax relief is available on annual bonus payments made to employees of Employee Ownership Trust owned companies.

Legislation introduced in Finance Bill 2024-25 will amend sections 13 and 28 of Inheritance Tax Act 1984 to:

• ensure that the restrictions on connected persons benefiting from an Employee Benefit Trust must apply for the lifetime of the trust
• restrict the Inheritance Tax exemption to where the shares have been held for two years prior to settlement into an Employee Benefit Trust — where there has been a share reorganisation, the shares previously held will be taken into account in considering the two-year holding period
• ensure that no more than 25% of employees who can receive income payments should be connected to the participator in order for the Employee Benefit Trust to benefit from favourable tax treatment

Summary of impacts

Exchequer impact (£ million)

2024 to 2025	2025 to 2026	2026 to 2027	2027 to 2028	2028 to 2029	2029 to 2030
Nil	Nil	Nil	Nil	Nil	Nil

This measure is not expected to have an Exchequer impact. This measure supports the Exchequer in its commitment to protect revenue.

Economic impact

This measure is not expected to have any significant macroeconomic impacts.

Impact on individuals, households and families

This measure will impact individuals who are involved with existing Employee Ownership Trust owned companies or companies that may transition to Employee Ownership Trust ownership in the future (either as former shareholders, trustees, office holders or employees of the company).

This measure will have a positive impact on employees of Employee Ownership Trust owned companies as the changes are intended to reinforce employee engagement and participation and ensure that the reliefs are not abused to obtain unfair tax advantages to the detriment of the interests of the employees.

This measure is expected overall to improve individuals’ experience of dealing with HMRC as associated changes will simplify the process of disposing of company shares to an Employee Ownership Trust.

This measure will have a positive impact on individuals who make transfers of value to Employee Benefit Trusts by giving clarity on the conditions for such transfers.

The measure is not expected to impact on family formation, stability or breakdown.

Equalities impacts

This measure will impact individuals who are involved with existing or future Employee Ownership Trust owned companies or Employee Benefit Trusts, either as shareholders, trustees, office holders or employees of the company.

HMRC do not hold information about the protected characteristics of these individuals, however it is not anticipated that there will be disproportionate impacts for those in groups sharing protected characteristics.

Impact on business including civil society organisations

Overall this measure will have a negligible impact on companies that transition to Employee Ownership Trust ownership and businesses who make transfers to Employee Benefit Trusts.

This measure will have a positive impact on companies that transition to Employee Ownership Trust ownership, as the measure is intended to enhance employee engagement and therefore increase productivity and growth.

This measure will have a positive impact on businesses who make transfers of value to Employee Benefit Trusts by giving clarity on the conditions for such transfers.

One-off costs will include familiarisation with the changes. There are expected to be no further one-off or continuing costs.

Customer experience is expected to remain broadly the same as it does not affect how businesses will interact with HMRC.

The measure is not expected to impact civil society organisations.

Operational impact (£ million) (HMRC or other)

There are no operational impacts for HMRC in implementing this measure.

Other impacts

Other impacts have been considered and none have been identified.

Monitoring and evaluation

The measure will be monitored through information collected by tax returns and feedback from stakeholder groups.

Further advice

If you have any questions about this change, contact the Capital Gains Tax policy team by email: [email protected].