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New reliefs for 'Employee-Ownership Trusts'


Hopes were riding high when the Chancellor
reconfirmed in the Autumn Statement the government’s commitment to
affording new reliefs from CGT on a sale of shares to an employee-owned
structure, and from income tax for bonus payments made to employees of a
company with such an ownership structure. It was therefore
disappointing to discover, when the draft legislation was published,
that such reliefs will be available only in relation to companies
majority owned by a trust which has very restricted powers of
distribution such that the trusts of the settlement do not, inter alia,
permit the trust property to be applied at any time other than for the
benefit of all eligible employees on the same terms, or for charity. The
fact is that few, if any, existing employee share trusts have such
restricted powers and, apart from accessing the new reliefs, there would
appear to be little if any commercial imperative to structure a trust
in this way. It is therefore understandable that the government
(although no longer affording relief from NICs for qualifying bonus
payments made by such a company) can nevertheless now afford:

  • to increase, to £70 million per tax year (it was originally to be £50million), the ‘pot’ available to fund such reliefs;
  • to increase the limit on such tax-free bonuses to £3,600 per year;
  • to allow the income tax relief to be given at the applicable rate at which the employee pays tax (lower or higher);
  • to ensure (if there was doubt) exemptions from inheritance tax on
    transfers of shares or other assets to an EOT, and the 10-yearly charge on trust
    property held by an EOT; and
  • introduce a (proposed new) relief from stamp duty/SDRT for such transfers……

….as the fact is that relatively few companies and
their shareholders are likely to be in a position, or want, to commit to
the lack of flexibility as to the application of the trust fund simply
in order to secure access for vendor shareholders and the company itself
to such new reliefs.

It should be noted that the form of ‘model trust
deed’ settled with HMRC at the behest of the Dept for Business,
Innovation & Skills, consequent upon the Nuttall Report, will not
qualify as an EOT.

CGT relief on a sale to an EOT

The relief, which must be claimed, is for a disposal
by a person other than a company (so by an individual, partnership or trustees only)
to an EOT. The relief is given by securing that the disposal is on a
‘no-gain/no-loss’ basis and that s17(1) (deemed disposal for market
value) does not apply. The company whose shares are sold must be a
trading company or the principal member of a trading group and remains
so throughout the tax year of the disposal. The trust must be an EOT.
The trust must not have met the ‘controlling interest requirement’
before that tax year, but must meet it at the end of that year. The
‘limited participation (by the vendor) requirement’ must be met, and the
relief must not have been available to the vendor, or a connected
person, in relation to a related disposal occurring in an earlier tax

Conditions for a trust to qualify as an EOT

The ‘equality requirement’

The trusts must not permit any of the settled
property to be applied, at any time, (a) otherwise than for the benefit
of all the eligible employee on the same terms; (b) in the creation of a
trust or by transferring property to the trustees of any settlement (so
no ‘power of resettlement’, or transfer of shares to a SIP trust, is
allowed !); or (notwithstanding the ‘disguised remuneration rules’) in
the making of loans to beneficiaries. If at any time property is to be
applied for beneficiaries, the employees to whom it is applied must
include any person employed by the company or group, but not a 5%+
participator in the company (or, if a member of a group, any member of
that group), or anyone else who is a 5%+ participator in any close
company which has made a disposition which, but for s13 IhT would have
been a transfer of value to the trust, anyone else who was such a 5%+
participator in any such company within the past 10 years, or any person
connected with any such person.

Surviving spouses, civil partners or dependants of a
deceased employee may benefit for up to 12 months after the date of
death, and employees with less than 12 months’ continuous employment or
those who ask not to benefit (e.g. for religious reasons) may be
excluded from benefiting on any occasion. Property can be applied by
reference to individual remuneration, length of service and hours
worked, but only on the basis that each such factor gives rise to a
separate entitlement and all employees must receive something. The
‘equality requirement’ is also infringed if any features of the trust
have the effect of conferring benefits wholly or mainly on directors, or
employees of a particular company or part of the group, or carrying on
particular activities.

The ‘controlling interest’ requirement

The trust must hold more than 50% of the issued
ordinary share capital and have majority voting control of the company.
It must also be entitled to more than 50% of the profits available for
distribution, more than 50% of assets on a winding-up, and there must be
no arrangements whereby these requirements can cease to be met without
the consent of the trustees.

The ‘limited participation requirement’

Within the 12 months after the disposal, either the
vendor must not be a participator in the company or, if the vendor
remains a participator, the proportion of employees of the company or
group represented by the vendor, other participators, employees and or
directors and connected persons, must not exceed 40%.

Subsequent deemed disposal/reacquisition by the trustees

If any of these requirements subsequently cease to be
met, the trustees are deemed to dispose of, and reacquire all of the
shares held at its market value, thereby triggering a charge to CGT on
the part of the trustees. (There is relief if the shares are resettled
on the trusts of another EOT in relation to which all the requirements
are met, but this is at odds with the principal requirement that the
trusts must not include any power of resettlement!)

Income tax exemption for qualifying bonus payments by a company owned by an EOT

On and after 1 October 2014, a qualifying bonus
payment of up to £3,600 paid by a trading company (or member of a
trading group) owned by an EOT is exempt from income tax (but not from

The payment must not be a payment of regular salary
or wages, must not be paid under a ‘salary sacrifice’ arrangement, and
must not be paid by a ‘service company’ (as specially defined).

All employees of the company, or group, must participate on the same terms, save only that:

  • there may be an eligibility requirement of up to 12 months continuous service; and
  • awards can be determined (on a linear basis) by reference to remuneration, length of service and hours worked

but all participating employees must receive
something, and the scheme must not have the effect of conferring
benefits wholly or mainly on directors, the highest paid or employees
engaged in a particular part of the business or member of the group, or
who carry on particular activities.

So companies controlled by existing EBTs will not qualify for the new reliefs……?

The summary of responses published by HM Treasury to
the consultation on ‘Supporting the employee-ownership sector’ states
that “the Government does not wish to compel existing EBTs to amend
their trust deeds…[and]…is therefore considering ways in which it may be
possible for the eligibility of such trusts to be judged on behaviour
(i.e. whether the trustees have acted in all material respects as though
they were trustees of an EOT throughout a specified period) rather than
by reference to the terms of their trust deeds”. It intends to publish
(further) legislation in the New Year.

Existing EBTs incapable of meeting the EOT
requirements (e.g. because the trust deed excludes employees of certain
members of the group) will need to amend the trust deed (if possible) or
resettle property in a new trust (which may, again, not be possible
under the terms of the existing EBT) if they wish shares in the company
to be held by the trustees of an EOT. It is stated that a CGT disposal
on such resettlement might qualify for the new relief from CGT.

The Government is considering reviewing the income tax exemption in 5 years time.