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New CGT and income tax exemptions for employee ownership trusts

Waiting for a star to fall...Important new tax exemptions to promote the employee ownership (“EO”) sector will take effect in the 2014-15 tax year.  The Budget 2014 report confirmed this. The EO Waiting for a star to fall...

Important new tax exemptions to promote the employee ownership (“EO”) sector will take effect in the 2014-15 tax year.  The Budget 2014 report confirmed this.

The EO sector has a good idea of what these exemptions will look like.  But it is still waiting for the final, all important, detail.  The sector has to wait a little longer, until the Finance Bill is published, to see this detail.

In Budget 2013 the Government announced that it ”supports employee ownership as a business model and welcomes work by the Implementation Group on Employee Ownership to take forward the recommendations of the Nuttall Review…”.  Chancellor George Osborne’s Autumn Statement 2013 speech confirmed “We set out major reforms to encourage employee ownership”.  The consultation clauses published on 10 December 2013 gave first sight of the detail of the new tax exemptions to promote the indirect model of EO.  A separate article contains all the relevant background materials.

In outline, the key exemptions are:

  • an exemption from capital gains tax on gains on certain disposals of shares in a trading company (or in a holding company of a trading group) that provide an employee-ownership trust (“EOT”) (as defined) with a controlling interest in that company (the “CGT exemption”); and

  • an exemption from income tax of £3,600 per employee per tax year for certain bonus payments made to employees of qualifying employee-owned companies (the “income tax exemption”).


These exemptions have been welcomed enthusiastically by the EO sector.  The CGT exemption will raise awareness of employee-buy outs as a succession solution.  The income tax exemption means companies 100% owned by an EOT will not need to establish a share incentive plan, and be forced to use shares to make income tax free awards to staff; they may now pay income tax free bonuses to staff without detracting from their 100% indirect EO structure.  Both these exemptions will help with financing EO.

This enthusiasm is, however, subject to some important amendments and clarifications being made when revised draft clauses are published on 27 March 2013.

One hope is that an EOT can become the new best practice commercial benchmark for the design of an employee trust used for indirect EO purposes.  The potential is definitely there provided changes are made to the consultation draft. Most of the additional restrictions that an EOT must meet in comparison to the current benchmark (set by section 86 of the Inheritance tax Act 1984) are acceptable to the EO sector.  But additional flexibility is needed. Provisions in the consultation draft that are unacceptable to many in the EO sector include for example:

  • the complete exclusion of former employees as potential beneficiaries, and

  • the inability to have over-riding powers to provide additional flexibility over the 125 year life of an EOT.


It would also help if shares could be available to support direct EO alongside maintaining a controlling shareholding in the EOT. If the EOT, in addition to retaining a controlling shareholding, could also warehouse shares for use under tax advantaged share plans then a single trust could support both direct and indirect EO.

Budget 2014 confirmed that the Government will consult on the Office of Tax Simplification proposal to introduce an employee shareholding vehicle. This could be a vehicle to meet the need to facilitate sales by employees of relatively modest quantities of shares that they have acquired via a share plan. As previously acknowledged by the OTS this need and that addressed, for many, by the EOT, of holding a large static shareholding "should be considered together, in order to have a consistent approach to a common theme, and to avoid complexity and contradiction in any resulting legislation".

Budget 2014 provided no additional details on the EOT tax exemptions and so the EO sector now has to wait until 27 March 2014 to see the Finance Bill clauses.

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