The UK government’s Autumn Budget on 30 October 2024, introduced several changes to EOTs. These changes aim to make the rules more robust and ensure that EOTs are used for their intended purpose of benefiting employees rather than for tax avoidance.

The following changes apply to EOTs established on or after 30 October 2024:

• Control restrictions: Former owners of a company (or connected persons) are now restricted from retaining control of the company by controlling the EOT itself. This change is intended to ensure that EOTs genuinely represent employee ownership and that the former owners do not exert undue influence over the trust’s operations.
• Trustee residency: Trustees of the EOT must be UK residents at the time of disposal to the EOT. This requirement ensures that the trust operates within the legal framework established for EOTs in the UK, which is designed to promote employee ownership and provide certain tax benefits.
• Extended disqualifying events period: The period during which the company must meet qualifying conditions for capital gains tax (CGT) relief has been extended from one tax year to four tax years following the tax year of disposal. This means if a disqualifying event occurs within the first four tax years, the CGT relief for the vendor shareholders will be withdrawn, with CGT becoming due on the gain that occurred at the time of disposal.
• Valuation requirements: Trustees must take ‘reasonable steps’ to ensure that the consideration paid for the company’s shares does not exceed their market value. While specific guidance on what constitutes reasonable steps hasn’t been provided yet, it’s clear that failing to meet this requirement has significant consequences. If trustees cannot demonstrate that they took reasonable steps, the disposal will not qualify for CGT relief. Additionally, any contributions received by the trustees from the company will be treated as taxable distributions.
• Relief for distributions to EOTs: The tax treatment of contributions from the company to the EOT to fund the acquisition will be clarified through legislative changes. Whilst such contributions will be treated as distributions, relief will specifically be available for amounts which are used to fund the trustees acquisition costs. These include the consideration payable to the vendor shareholders and stamp duty due on the acquisition or interest payable on deferred consideration, to the extent it doesn’t exceed a commercial rate. This change will ensure that, in most cases, the distributions will not be taxable on the trustees.