Employee-Ownership Trusts (“EOT”) Print
EOT were introduced as part of the government’s strategy to encourage employee ownership of the company that they work for, and came into effect from 6 April 2014. EOT provide a tax efficient route for succession of the management of a company, and also provide certain tax advantages for the employees.
The EOT must acquire sufficient shares for it to have a controlling interest in the company (“C”) which must be a trading company. The trustees must:
Hold more than 50% of the ordinary share capital of C, and
Have more than 50% of the voting power
Be entitled, on a winding up of C, to more than 50% of the assets of C available for distribution to the equity holders.
In addition there must not be any provision whereby the above conditions can cease to be satisfied without the consent of the trustees.
Relief from CGT is given to the vendor shareholder so that on disposal of his shares neither a gain, nor a loss arises. There is no requirement that the disposal consideration should be for an amount less than open market value of the shares, so the vendor may receive full value for his shares. This would normally be funded out of a contribution from C to the trustees.
All employees must benefit from the EOT, and the settlement must not permit any of the trust property to be applied otherwise than for the benefit of all eligible employees on the same terms. For this purpose an eligible employee is any employee or office holder of C other than a participator (shareholder).
The EOT is not permitted to form sub-trusts or grant loans to employees.
The distribution from an EOT is not required to be paid equally to each employee, and employees with less than 1 year’s service can be excluded. Distributions can be adjusted to reflect the employee’s pay, length of service, or the hours worked.
Subject to certain conditions a bonus of up to £3,600 may be paid by C to each employee, but this must not form part of the employee’s regular salary or wages. The payment must be made to all employees and under the same terms, although as above the amounts paid to each employee can be varied to reflect the employee’s pay etc. The bonus payment is exempt from income tax, but remains within the charge to NIC.
There are various disqualifying events which can trigger a CGT charge on the trustees who are then liable to pay CGT as if they had disposed of the shares in C at the market value of the shares at that time. For these purposes a disqualifying event is:
C ceases to meet the trading requirement;
The EOT ceases to meet the all-employee benefit requirement;
The EOT ceases to meet the controlling interest requirement;
There are more participators than allowed;
The trustees act in a way which is not permitted by the EOT requirements.