Information recently published by RSM UK as a result of a Freedom of Information request to HMRC shows an unprecedented level of growth in companies applying for clearance to set up Employee Ownership Trust structures.
Employee Ownership Trusts (EOTs) offer a way for companies to become employee-owned; they offer a tax efficient vehicle for exiting shareholders, who sell a controlling stake to the EOT and in return pay a zero rate of Capital Gains Tax, provided the relevant conditions are met. The sales proceeds are usually funded out of the future profits of the business.
Prior to setting up the EOT structure, a clearance application is submitted to HMRC to confirm that they will not seek to apply anti-avoidance legislation governing "transactions in securities".
The data published by RSM UK reveals that in 2019, a total of 38 companies made an EOT-related clearance application to HMRC; in 2020 this increased to 100 companies, and by 2021 it increased to 383 companies. In the first four months of 2022, 123 EOT-related clearance applications have been submitted.
The growth in popularity of the employee ownership model (and in particular the EOT structure) may be attributed to a number of factors, including:
- perceived advantages in terms of productivity and profitability;
- increasing awareness and acceptance of the employee ownership approach;
- a viable and potentially more straightforward solution to succession/ exit, compared to traditional M&A; and
- the 2020 reduction in the Business Asset Disposal Relief (formerly Entrepreneur's Relief) Lifetime Allowance from £10m to £1m, which has effectively increased the rate of CGT on significant disposals of shares in trading companies.
We expect to see continued growth in the popularity of EOTs in the coming months, for all the reasons detailed above.