HMRC releases further guidance on tax treatment of new business succession model
The Finance Act 2014 introduced a number of tax reliefs which benefit companies owned by employee ownership trusts (EOTs). An EOT is a new form of employee benefit trust (EBT) which potentially offers a business succession solution for owner-managed businesses.
An EOT potentially attracts three forms of tax relief, namely:
- an exemption from capital gains tax for an individual who disposes of qualifying shares to an EOT;
- an exemption from inheritance tax (IHT) for the disposal of shares and other assets into an EOT; and
- a company owned by an EOT can pay a qualifying bonus of up to £3,600 a year per employee free of income tax.
In order to benefit from the application of the capital gains tax exemption on a disposal of shares to an EOT a number of conditions must be met:
- the company whose shares are disposed of must be a trading company, or the parent company of a trading group, throughout the tax year in question;
- the trust acquiring the shares must be operating for the benefit of all of the employees;
- there is “limited participation” in the company after the disposal (this is a condition to do with the proportion of shareholders to employees);
- the trust must not hold more than 50% of the share in the company at the beginning of the tax year but must do so at the end of the tax year.
Some of these conditions are the same or similar to those which exist in relation to EBTs, and some EBTs may already qualify as EOTs.
Last month, HMRC updated its Inheritance Tax Manual to give further guidance on the application of the conditions for the capital gains tax exemption to apply to a disposal of shares. The new guidance comes at a time of increasing interest in employee-owned business models. The Chief Executive of the Employee Ownership Association, Iain Hasdell, recently stated that “the number of employee owned businesses in the UK is growing at an annual rate of 9%”, adding that the productivity of employee owned businesses “is increasing at an average of 4.5% year on year”.
MacRoberts is experienced in advising employers on the types of employee ownership models which they can bring in to incentivise staff and ensure continuity for their business going forward.