HMRC’s Consultation On Employee Ownership Trusts And Employee Benefit Trusts – Employee Benefits & Compensation

HM Revenue & Customs (HMRC) is consulting on proposals for
targeted reform of the EOT and EBT tax regimes (the Consultation).
The Consultation closes on 25 September 2023, so
it is not too late to have your say in the Consultation. Please see
details below about how to respond to this Consultation and the
website link to HMRC’s Open Consultation that sets out details
of HMRC’s reasons and proposals in support of legislative
reform.

Background to the Consultation:

HMRC has invited the public to share their views and opinions
about proposed reform to the EOT and EBT legislation, with the aim
of keeping these types of trust focussed on incentivising and
retaining key members of staff rather than using these for improper
reasons to facilitate tax relief abuse. Within the Consultation
publication, HMRC states that the “key principles underpinning
these reforms are to ensure that the favourable tax treatment
remains available to those who use EBTs and EOTs for the intended
policy purposes, whilst preventing tax advantages being obtained
through use of these trusts outside of these intended
purposes.”

HMRC’s Open Consultation published on 18 July 2023

EOT – Consultation

An EOT is a specific type of employee trust which holds a
controlling interest in the company for the benefit of all
employees on the same terms. EOTs are given tax-favoured treatment
through tax reliefs introduced in 2014. These include tax reliefs
for individuals who dispose of shares in a trading company or
parent company of a trading group to the trustees of an EOT. Where
the disposal qualifies for relief, the individuals (i.e. the
departing owner(s)) will benefit from 100% Capital Gains Tax relief
on their share disposal. Additionally, relief from income tax is
available on qualifying bonuses of up to £3,600 per employee
of the EOT owned company. The policy objective of the tax reliefs
is to encourage and incentivise the growth of the employee-owned
sector.

HMRC is consulting on some significant changes to the EOT
legislation. These include proposed changes to:

1. Prohibit former owners and connected persons from retaining
   control of an EOT-owned company post-sale by appointing themselves
   in control of the EOT trustee board (most EOT trustees are
   corporate trustees i.e. companies set up for the sole purpose of
   being the trustee of the EOT). The Consultation seeks views on
   whether this reform should go further and possibly require that the
   EOT trustee board includes those drawn from specific groups, such
   as employees or independent persons. This is something Birketts
   would welcome.




2. Require that the trustees of an EOT are UK residents as a
   single body of persons. At present there is no restriction on the
   appointment of non-UK resident trustees, even though the departing
   owner(s), company and employees are all located in the UK.
   Appointing non-UK resident EOT trustees would mean that there is no
   UK CGT on the disposal of the company’s shares by the trustee,
   nor on a deemed disposal were a disqualifying event to occur under
   the EOT legislation. One of HMRC’s concerns is that the
   appointment of non-UK resident EOT trustees could be done as part
   of an arrangement to reduce future tax.




3. Amend the Corporation Tax legislation to provide that
   contributions to an EOT by the company in order to pay for the
   shares acquired from departing owner(s) are not treated as income
   distributions. This would be a welcome simplification since
   practitioners are currently forced to seek HMRC clearances on this
   point for each transaction.

EBT – Consultation

An EBT is a trust which is set up for the benefit of employees
or office holders of a company or group of companies (referred to
as an EBT).EBTs may be set up for a range of purposes, such as to
reward and motivate key executives through share ownership.For
companies listed on the London Stock Exchange (main market), they
may be used to maximise headroom for the grant of share-based
awards, via market purchased shares, including if institutional
investors’ guidelines operate to restrict awards of new issue
shares under flow rates. In more recent years the operation of EBTs
has been impacted (in part) by the Disguised Remuneration (DR)
legislation that was introduced in 2010. The DR legislation may
bring forward the date(s) on which charges to PAYE/NICs might
otherwise apply in respect of share or cash awards or recognition
payments where such awards, payments etc. are ‘earmarked’
by a third party (including the trustee of an EBT) for the benefit
of employees/beneficiaries.

Notwithstanding the above, EBTs remain a flexible vehicle for
employers to structure a variety of incentives. They also benefit
from certain Inheritance Tax (IHT) reliefs if they meet certain
conditions, including exemption from IHT on transfers to the
trustee of the EBT and reliefs from the IHT tenth anniversary and
exit charges.

HMRC’s concern is that some EBTs are being set up for the
primary purpose of benefiting participators (the key shareholders
and people connected with them) from the IHT exemption/relief which
is not in line with its policy objective – to encourage the use of
EBTs in a way to incentivise a wider class of employees.There are
three proposed changes:

1. To restrict persons connected with a participator in the
   company from benefiting from the EBT for its lifetime. On this
   proposed change, HMRC has seen cases where the trust deed of the
   EBT allows individuals connected to a participator to benefit from
   the capital of it after the participator’s death.




2. To only allow a settlor of the EBT to benefit from the IHT
   exemption on transferring shares to an EBT where the settlor has
   held the shares for at least two years. Currently there is no
   restriction on how long settlor must have held shares before their
   transfer into an EBT to gain this exemption.




3. To exclude participators and persons connected to them from
   benefitting, so that no more than 25% of employees who are able to
   benefit from income payments under an EBT can be connected to the
   participator in order for the EBT to benefit from favourable IHT
   treatment. Currently persons connected to the participator are
   excluded from benefitting from the capital of the EBT but are still
   able to benefit from income payments from the trust.

How to respond to HMRC’s open consultation

Written responses can be made by post to HMRC (as follows):

Assets and Residence Team

HM Revenue and Customs

100 Parliament Street

London

SW1A 2BQ

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.