Tax incentives for Employee Ownership Trusts (EOT)

Capital Gains Tax relief for disposals to ‘Employee Ownership Trusts’

The Finance Act 2014 introduced a relief from capital gains tax (CGT) on gains derived from the disposal of at least a controlling interest (over 50% +1 Share) of the total shares in a trading company (or in a holding company of a trading group) to a qualifying statutory ‘Employee Ownership Trust’ (EOT).

To qualify for the relief owners must satisfy the following criteria:

  • The company whose shares are disposed of must be a trading company, or the parent company of a trading group;
  • The trust which acquires the shares must operate for the benefit all employees;
  • The trust must have a controlling interest in the company at the end of the tax year, which it did not have at the start of that year;
  • Certain participators must be excluded from being beneficiaries of the trust; and
  • The claimant must not previously have qualified for relief on the same company’s shares.

Assuming that all of these criteria are met the owner(s) would be deemed as making neither a capital gain nor loss on the disposal of their shares and will not be subject to capital gains tax on the proceeds from the disposal. This is an attractive incentive introduced to encourage business owners to consider the merits of employee ownership.

‘Income Tax exempt’ bonus

In addition to the GCT relief for owners who sell to a EOT, employees of a company owned by an EOT are able to benefit from an income tax exemption on certain bonus payments. Subject to conditions, up to £3,600 can be paid, per annum, to eligible employee who incur no income tax on this payment. The conditions that need to be satisfied are:

  • The bonus has to be a ‘discretionary bonus’ and must not consist of regular salary or wages;
  • All employees with at least 12 months’ service must be eligible to participate in the scheme pursuant to which the payment is made (participation requirement);
  • Every employee must participate in the scheme on the same terms (equality requirement);
  • The employing Company must be trading;
  • A qualifying EOT must own at least a controlling interest in the Company making the payment (or the principal company if the employer company is a member of a trading group); and
  • The EOT must meet the all-employee benefit requirement.

Broadly, all employees with at least 12 month’s service must be entitled to benefit from the bonus award, but the company will have discretion to set the bonus by reference to a percentage of salary, length of service or hours worked.

However, importantly, the exemption relates to income tax only. National Insurance contributions (NIC) will remain payable on the bonus by both the employer and the employees.