Key UK budget changes to Employee Ownership Trusts and what they mean for your business

The UK government’s recent budget announcement introduced important updates to the rules governing Employee Ownership Trusts (EOTs), with changes that directly impact companies transitioning to or operating as EOTs from October 2024 onwards. These updates focus on tightening tax relief, reinforcing governance, and ensuring financial fairness within the EOT structure. Here’s a look at the key changes and their potential impact on your business.

Higher Capital Gains Tax (CGT) rates for EOT transfers

For any disposals made on or after 30 October 2024, Capital Gains Tax rates have increased, now set at 18% for basic rate taxpayers (up from 10%) and 24% for higher rate taxpayers (previously 20%). This rate hike directly affects founders or shareholders selling shares to an EOT, potentially resulting in a larger initial tax burden on the sale.

For example, if a business owner plans to transfer ownership to an EOT, they’ll need to account for this increased CGT rate in their financial planning. The heightened tax liability may prompt businesses to explore strategic tax planning options to mitigate costs, ensuring the transition remains financially viable.

Inheritance Tax (IHT) relief adjustments for EOTs

Although the changes to Inheritance Tax relief on Agricultural Property Relief and Business Property Relief won’t take effect until April 2026, they’re expected to reshape tax planning for certain industries, particularly family-owned farms and other asset-heavy businesses. New guidelines may restrict the types of assets eligible for IHT relief when transferred to an EOT, impacting the tax efficiency of succession planning.

Example: A family-owned farm transferring ownership to an EOT may find that, under the new rules, certain property types no longer qualify for IHT relief, adding complexity to future succession strategies.

Stricter trustee board rules to reinforce genuine employee control

Under the new rules, former owners or “excluded participators” (those previously holding 5% or more of shares) are limited in their role on EOT trustee boards. They can no longer control the trust or make up more than half of the trustee board, reinforcing the need for independent and employee-centred governance.

E.g. If a business founder retains a position on the trustee board post-sale, they must now comply with strict limitations on influence. This shift promotes genuine employee control, ensuring the EOT remains focused on employee interests without former owners directing its activities.

Extended clawback period for Capital Gains Tax relief

The CGT clawback period has been extended, meaning EOTs must maintain their ownership structure for an additional three years to retain tax benefits. Should the trust exit its EOT structure or undergo a disqualifying event within this period, it could trigger a financial liability, effectively undoing the initial tax relief benefits.

For instance a company transitioning to EOT status must carefully manage its structure over this extended period, as any significant ownership changes within these years could lead to unexpected tax consequences, deterring quick exits from the EOT model.

Fair market value requirement on deferred consideration

To prevent inflated valuations that might burden employee-owned companies, deferred payments to previous owners now require independent market valuation. Additionally, any interest applied to deferred payments must be at a reasonable commercial rate, ensuring fairness for employee stakeholders who fund these buyouts.

Example: If a business owner agrees to deferred payments for their shares, the valuation must now be independently verified to ensure the payment structure doesn’t exceed fair market value. This safeguard protects employees from overpaying for the business and ensures a sustainable financial setup for the EOT.

These changes, from tax rate increases to stricter governance requirements, underscore the government’s commitment to creating a sustainable framework for employee-owned businesses. If you’re considering converting to an EOT or need guidance on compliance, contact Stephen Attree and our team to help to manage these new requirements and make your transition as seamless as possible. Read more on EOTs here