06.12.24 Strictly Boardroom

The legal implications of the recent changes to Employee Ownership Trusts

The Autumn Budget 2024 has brought significant changes to the legal landscape of Employee Ownership Trusts (EOTs). These reforms, while aimed at safeguarding the integrity of EOTs, have introduced complexities that businesses considering this ownership structure must navigate.

Key legal implications

Trustee independence requirement:

  • Former owners or connected persons are prohibited from retaining control of the company post-sale through the EOT.
  • Less than 50% of trustees can be former owners or connected persons.
  • Failure to comply within the first four tax years post-disposal triggers a disqualifying event, potentially leading to CGT clawback.

Trustee residency requirement:

  • All EOT trustees must be UK resident.
  • Offshore trustees are no longer permitted.

EOT income tax-free bonuses:

  • Rules have been relaxed to allow bonuses to employees without including directors.

Market valuations:

  • Trustees are required to ensure market valuations are now carried out. Where any element of the purchase price is deferred and attracting interest, the interest should not exceed what would be considered a reasonable commercial rate.

Long-term employee ownership:

  • EOTs must demonstrate a genuine commitment to long-term employee ownership.
  • Selling the company within four years of acquisition may trigger a CGT clawback.

Navigating the new landscape

The changes introduced by the Autumn Budget 2024 underscore the importance of meticulous legal advice when considering an EOT. Businesses must ensure compliance with the new regulations to avoid potential tax implications and maintain the integrity of their EOT structure.

O'Connors is well-equipped to assist businesses in understanding and navigating the complexities of EOT legislation. Our team of experienced lawyers can provide tailored advice on:

  • Structuring EOTs to comply with the new regulations.
  • Assessing the impact of the changes on existing EOTs.
  • Developing robust governance frameworks for EOTs.

By partnering with O'Connors, businesses can confidently embrace the benefits of employee ownership while mitigating the legal risks associated with these significant reforms.

For further information, please email Craig Geraghty or call 0151 906 1000.