EOTs must promote genuine employee ownership, says CIOT

“Rigorous” rules are required to prevent the exploitation of Employee-Ownership Trust (EOT) tax benefits, says the Chartered Institute of Taxation (CIOT).

EOTs, along with EBTs (Employee Benefit Trusts), are government initiatives which allow business owners the opportunity to sell their shares to an employee-owned trust free from capital gains tax.

Responding to a government consultation, the CIOT said the tax benefits of the initiative should be used to promote and incentivise genuine employee ownership and engagement, with many employees not currently seeing the benefits.

Christopher Thorpe, a technical officer for the CIOT, said:

“As well as tackling potential abuse, our main concern is to ensure the EOTs fulfil their original intention and sentiment. The main benefit, at the moment, lies with the former owner who may qualify for CGT relief on the creation of the settlement, whereas the only benefit for employees is the £3,600 income tax-free bonus.

“If employees receive any additional benefit from the company, often in the event of company shares being sold and the proceeds distributed, the trustees will pay CGT with employees being taxed on that same amount as earnings.

“While this double taxation element may serve a useful purpose by encouraging owners to adopt a long-term approach and use the EOT as a trading vehicle rather than as a prelude to a third-party sale, it sits uneasily with the concept of employees owning the business, showing instead that it’s merely indirect ownership.

“A simple way to give the employees a greater benefit would be a substantial increase in the employee bonus, which has remained unchanged since 2014, plus an NIC exemption on that bonus. This would give the employees the impression of having a genuine stake in the success of the underlying company.”

The CIOT also warned that if rules are too prescriptive, it could affect the day-to-day running of EOTs and EBTs, discouraging owners from setting them up.

Christopher Thorpe added:

“While we want to see a rigorous set of rules to allow the vendor of the company to enjoy the tax benefits, they should not be so prescriptive as to make the establishment and future running of an EOT unnecessarily onerous or commercially unviable.

“While we can see some merit in the introduction of criteria of minimum employee involvement, overly-prescriptive rules on membership could discourage business owners from selling to an EOT, given the potential difficulty of finding people from specific groups.

“We are, however, pleased to see that many of the recommendations we put forward in our 2021 submission have appeared as proposals within this consultation and, as such, we broadly support them.”