Government announces review of EBT/EOT tax rules for UK employees

On 18 July 2023, the UK government announced a new consultation to review the proposals of targeted reforms to the Employee Ownership Trust and Employee Benefit Trust tax regimes. This consultation is set to last for 10 weeks until 25 September 2023.

According to GOV UK, the consultation will be used to gather views on proposals to reform the tax treatment of Employee Ownership Trusts (EOTs) and Employee Benefit Trusts (EBTs) to ensure that the regimes remain focused on the targeted objectives of rewarding employees and encouraging employee engagement. Proposals to reform Inheritance Tax treatment for Employee Benefit Trusts will also be reviewed.

An Employee Ownership Trust (EOT) is a type of EBT in which the trustees own the company and can exercise control of the company for the benefit of all employees. EOTs are provided tax-favoured treatment through tax reliefs, which were first introduced in 2014.

The key concepts of these reforms are to make sure that the favourable tax treatment remains available to those who benefit from EOTs and EBTs for the intended policy purposes, whilst preventing tax advantages being acquired through the use of these trusts outside of their intended purposes.

Upon hearing the news of the consultation, senior corporate solicitor, Nikki Reid, said:

This presents a valuable opportunity for positive changes to the current legislation and the need to unnecessarily add to HMRC's 'to do' list. Employee Ownership Trusts have been gaining traction as an attractive exit option for entrepreneurs and as an employee shared ownership model that aligns perfectly with certain (definitely not all) businesses' cultures. I am particularly pleased to see an emphasis on the need to ensure meaningful employee engagement whilst acknowledging the importance of the continued input from the founders and former owners.

Ian Fraser, Employee Share Schemes Partner noted:

This is a welcome opportunity to clarify various aspects of the EOT rules, in particular that selling shareholders can remain involved in running the business without breaching the control rules and that contributions can be made by the company to the EOT to fund the share sale transaction without being treated as distributions. It also makes sense to review the rules on tax free bonuses, which are currently of very limited use.