Legal development

UK government launches consultation on employee ownership trusts and employee benefit trusts

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    On 18 July 2023, the UK government published a consultation document on reforming employee benefit trusts (EBTs) and employee ownership trusts (EOTs). The purpose of the consultation is to confirm that EBTs and EOTs continue to encourage employee engagement, and ensure that the associated tax benefits remain available to those who use EBTs and EOTs for the correct policy purposes. The consultation will run until 25 September 2023. 

    What are EBTs and EOTs and how are they used?


    EOTs were introduced in 2014 following the 2012 Nuttall Review of Employee Ownership which confirmed that employee-owned companies perform better and have more committed and engaged employees. Under an EOT structure, control of a company is held by the trustees of the EOT who are required to apply the trust property for the benefit of all the eligible employees of a company/group. The original company owner transfers control of their company to employees via a trust, thus encouraging employee ownership.

    Using an EOT  structure as part of a buy-out has become increasingly popular to encourage employee ownership.  Provided the legislative requirements are satisfied, the tax benefits available include: 

    • company owners who sell their controlling interest in their company to an EOT receive Capital Gains Tax (CGT) relief on the disposal,
    • income tax relief on qualifying employee bonuses of up to £3,600 per year free, and
    • Inheritance Tax (IHT) relief on transfers to EOTs.


    EBTs are a type of discretionary trust which are set up for the benefit of employees or office holders of a group.  The benefits provided may be pensions, sick pay, a share of profits, shares or almost anything the employer chooses.  Provided an EBT satisfies the specific legislative requirements, it can benefit from certain IHT reliefs.  For instance, the EBT will get relief from IHT relevant property trust charges of up to 6% at each ten year anniversary of the EBT being set up, and exit charges on capital distributions from the EBT. Additionally, transfers into an EBT that meet conditions under governing legislation will be exempt from IHT where there is a transfer of shares or securities in a company by an individual.

    Why is this consultation happening now? 


    From a commercial perspective, one key issue that arises post buy-out is that former directors of companies often appoint themselves as trustees, which means they effectively retain control of the company.  Similarly, corporate trustees that are appointed can act as a proxy for former business owners continuing to control the company.  

    From a tax perspective, the Government also wishes to clamp down on non-resident EOTs being set up to simply avoid CGT (notably this proposal is not also made in respect of EBTs).  

    Further, from a tax perspective, following a buy-out, consideration is normally due to formerbusiness owners in order to repay them for the acquisition cost of the company's shares.  This is normally paid to them post buy-out, over time, and is funded through distributions of the company's profits paid to the EOT trustee.  At present there is a significant amount of ambiguity as to whether those payments made by the company to EOT trustees should be taxed as distributions.  As a matter of custom and practice,

    HMRC generally accepts these contributions should not be taxed as distributions, but this requires further clarity from HMRC as the legislation is not definitive on this point.  

    Finally, regarding the £3,600 tax free bonus that can be made in respect of an EOT, at present no bonus can be paid if the number of directors when compared to the total number of employees exceeds a ratio of 2:5.  It would make more sense to be able to award tax free bonuses to employees, even where no directors are included. 


    In respect of EBTs, whilst the Government believes EBTs should continue to be used to provide employee benefits, there has been controversy in respect of their purpose.  The conditions to obtain IHT relief are intended to ensure that EBTs cannot benefit only those people who are shareholders in the company (participators), or people connected with them.  The class of people who can benefit must instead include all or most employees.

    What proposals are being made in the consultation?


    As the tenth anniversary of the EOT approaches, the Government wants to assess whether EOTs continue to support employee ownership in the appropriate way. 
    Specific proposals include: 

    • to ensure former owners do not continue to control the company, requiring that over half of the trustees of an EOT are not the former owners or persons connected to them, 
    • to ensure the EOT is not set up to avoid CGT, requiring that the EOT trustees EOT are UK residents; or that the trustees be a mix of UK  and non-UK residents and that the former owner was a UK resident at the date the shares were disposed of to the EOT, 
    • to provide clarity on how company profits paid to the EOT are taxed, confirming that contributions made by the company to the EOT trustees to repay the former owners are not taxable as distributions, and
    • amending the qualifying employee bonus payment rules so that bonuses do not need to be paid to directors.


    The Government has concerns that some EBTs are being used in ways that incentivises a wider class of employees than what was intended. It has therefore proposed changes to the legislation to:

    • ensure that individuals connected to a participator may not benefit from an EBT after the participator's death, 
    • impose additional requirements that settlors must meet in order to benefit from IHT relief when transferring shares to an EBT, and 
    • limit the number of individuals who are connected to a participator from being able to benefit from income earned by the EBT.

    Responses raised in the consultation should be submitted by 25 September 2023, by email to

    A copy of the consultation can be found here.

    Please get in touch with a member of our Tax or Incentives team if you wish discuss any of the issues raised by the consultation or an EBT or EOT arrangement. 

    The information provided is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to.
    Readers should take legal advice before applying it to specific issues or transactions.


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