HMRC Seeks Feedback on Employee Ownership Trusts and Employee Benefit Trusts

HM Revenue & Customs (HMRC) is currently seeking feedback from the public on proposed changes to the tax regimes for Employee Ownership Trusts (EOTs) and Employee Benefit Trusts (EBTs). The consultation period is open until 25 September 2023, allowing individuals to have their say on the potential reforms.

The aim of the proposed changes is to ensure that EOTs and EBTs are used for their intended purposes of incentivizing and retaining key employees, rather than being misused for tax avoidance schemes. HMRC wants to preserve the favorable tax treatment for those who use these trusts correctly, while preventing tax advantages from being obtained through misuse.

Employee Ownership Trusts (EOTs) are a specific type of trust that hold a controlling interest in a company for the benefit of all employees. These trusts receive tax advantages, such as capital gains tax relief for individuals who sell shares in a trading company to the EOT trustees. Additionally, income tax relief is available for qualifying bonuses paid to employees of the EOT-owned company.

The proposed changes to EOT legislation include prohibiting former owners and connected persons from retaining control of EOT-owned companies by appointing themselves to the trustee board. The consultation also seeks views on whether the trustee board should include specific groups such as employees or independent persons. Another proposed change is requiring that the trustees of an EOT are UK residents, preventing the appointment of non-UK resident trustees as a means of reducing future tax. Furthermore, it is proposed to amend the Corporation Tax legislation to simplify the treatment of company contributions to EOTs when acquiring shares from departing owners.

Employee Benefit Trusts (EBTs) are trusts set up for the benefit of employees or office holders of a company or group of companies. EBTs can be used for various purposes, such as rewarding and motivating key executives through share ownership. However, the operation of EBTs has been affected by the Disguised Remuneration legislation, which was introduced in 2010 to tackle tax avoidance schemes.

Concerns have been raised that some EBTs are being set up primarily to benefit key shareholders and individuals connected to them, rather than a wider class of employees. The proposed changes to EBT legislation aim to address this issue. One proposed change is to restrict individuals connected to a company’s key shareholders from benefiting from the EBT for its lifetime. Another proposed change is to require a minimum ownership period of two years for shareholders transferring shares to an EBT to benefit from Inheritance Tax exemptions. Additionally, it is proposed to limit the participation of connected individuals in the EBT’s income payments to ensure a broader distribution of benefits.

Overall, the consultation on EOTs and EBTs provides an opportunity for individuals to contribute their views on the proposed reforms. The aim is to ensure that these trust structures are used appropriately to incentivize and reward employees, while preventing misuse for tax avoidance purposes.

If you have any opinions or suggestions on how the tax treatment of EOTs and EBTs can be improved, you can respond to the HMRC’s consultation before 25 September 2023. Your feedback could help shape the future of these trust structures and ensure they serve their intended purposes in the UK.

Written responses can be made by post to HMRC

Assets and Residence Team
HM Revenue and Customs
100 Parliament Street