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Business Exits: Key Changes to Employee Ownership Trusts (EOTs)
January 14, 2025
If you are considering transitioning your business to an EOT, it is important you are aware of some key changes to the qualifying criteria for tax relief on EOTs:
1.Trustee independence
It is now a requirement that the selling owners may not retain control of the company after the sale. In practice this means that fewer than 50% of the trustees of the EOT may be sellers (or people connected to them). Note that the “connected persons” definition is a wide one, and should be checked carefully against the proposed list of trustees to ensure that this criterion is met. For smaller companies, this can be a challenging condition to overcome, however there are professional trustees who can be appointed.
2. UK residence
The trustees of the EOT must be resident in the UK both at the time of the sale of the company to the EOT and for a period of 4 years thereafter.
3. Commercial justification
It is now a requirement that the sale price for the shares paid by the EOT cannot represent higher than market value for the shares. Similarly, if any deferred consideration is payable, EOTs should not be paying above-market rates of interest. In our experience, when EOTs are structured, an independent valuation is usually obtained at the outset and therefore this is unlikely to result in a significant shift in practice. However, HMRC might seek more evidence that a proper valuation is obtained, and a valuation may need to stand up to more scrutiny.
4. Extended clawback period
It has always been the case that if any “disqualifying events” occur after completion of the sale to the EOT, HMRC could pursue the sellers and claw back the tax relief they had been granted. Previously, this period only related to the tax year after the sale completed. However, this has now been extended to 4 tax years after completion. This is quite a significant shift, and the extended period may well result in sellers seeking additional assurances from the EOT in relation to the conduct of the business after completion.
It is important to be mindful of these key changes when considering whether setting up an EOT is right for you and your business.
Get in touch with one of Darwin Gray’s expert M&A lawyers for a no-obligation chat about your possible succession options and if an EOT could be right for you and your business. Contact us on 02920 829 100 or via our contact form.
To speak to one of our experts today, please contact us on 02920 829 100 or by using our Contact Us form for a free initial chat to see how we can help.
