With significant tax changes introduced in the 2024 Autumn Budget – including increased capital gains tax (“CGT”) rates and reduced inheritance tax (“IHT”) relief – some business owners may be exploring ways to minimise tax liabilities when planning their exit.
Employee Ownership Trusts (“EOTs”) are largely unaffected by the recent reforms and continue to offer a tax-efficient option for an exit.
PM+M partner, Roger Phillips, explains why EOTs may now be more attractive than ever.
How did the 2024 Autumn Budget impact EOTs?
The Budget introduced changes to CGT, including changes to rate and to the availability of the relief known as business asset disposal relief (“BADR”), as well as some significant and well publicised changes to the IHT regime.
Despite speculation that EOTs might face increased scrutiny, they were largely unaffected by the Budget.
Key tax benefits of EOTs:
- 0% CGT: owners of companies, who sell their shares to an EOT may, where the conditions are right, benefit from an unlimited 0% effective CGT rate.
- A sense of ownership: employees may become more engaged and productive as a result of being part of an employee-owned business. Additionally, without individual shareholders extracting cash by way of dividend, there may be more money for the business to either invest and grow, or to reward its workforce – or both.
- Tax-free bonuses: In terms of rewards for the workforce, EOT-owned companies can pay their employees annual tax-free bonuses of up to £3,600 per employee. Whilst EOTs do not offer NIC relief, this added flexibility can help employers manage rising NIC costs while maintaining employees’ net pay.
Why consider an EOT as part of your exit strategy?
Tax efficiency
As of 30 October 2024, CGT rates rose to 18% for basic rate taxpayers and 24% for higher rate taxpayers.
BADR will become less valuable from 6 April 2025 as the 10% tax rate for gains falling within the first £1m of an individual’s qualifying lifetime allowance will rise to 14%. From April 2026 the rate for BADR qualifying gains will rise by another 4% to 18%.
In contrast to these tax increases, sales of shares to an EOT remain exempt from CGT, making it one of the most tax-efficient exit strategies available.
Contact our team
EOTs may offer a unique opportunity for business owners to exit, whilst preserving their company’s legacy, ensuring employee wellbeing and engagement, and maximising tax efficiency for the sellers.
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