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Miller’s tales: EOTs – policy and practice

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Government policy is to encourage long-term employee ownership of businesses and the tax break that was introduced in 2014 encourages employee ownership by providing that there is no capital gains tax on the sale of shares to an EOT, so long as a number of conditions are satisfied. While long-term ownership is not explicit in the legislation, the fact that the sale into an EOT is treated as a no gain/no loss transaction means that the trustees will often have a low base cost. If they were to sell the company, there would be a large chargeable gain, and any surplus that was then distributed to the employees would be subject to income tax and NICs, which is not a tax efficient approach. So, in effect, the system encourages sale to an EOT by eliminating the capital gains tax charge and discourages a subsequent sale by the trustees. However, there is nothing in the legislation to determine where the trustees should be resident, and we understand that at least one firm is reputed to advise on the use of non-resident trustees as a matter of course. Clearly, once the vendors have benefited from the tax relief for selling to an offshore EOT, there is nothing to stop those trustees selling the shares to a third party without suffering UK capital gains tax, which rather circumvents the wider policy. Furthermore, an offshore trustee isn’t the obvious choice for supporting genuine employee engagement. Both points were made in the CIOT’s recent submission to the chancellor on possible changes to the EOT legislation.

Another issue is that the only way the trust can pay for the shares is if it is funded by the company. But if payments to the company by the trust were taxed as dividends, the financing would not be viable. We currently rely on HMRC treating payments by the company to the trust as non-taxable ‘contributions’, and a non-statutory clearance can usually be obtained to confirm this treatment in each case. But this doesn’t feel entirely satisfactory to me, and another part of the CIOT’s submission on EOTs was to suggest that there should be provision for dividends or distributions made to the trustees to be free of income tax, to the extent that they were hypothecated to pay for the acquisition of the shares of the company, together with reasonable associated costs, such as interest, stamp duty and professional fees.

The other area of interest doesn’t directly relate to tax, it’s more of a governance issue. It is theoretically possible for the vendor shareholders to be the only or majority directors of both the target company and the trustee company following a sale to an EOT. This creates obvious conflicts of interest, particularly if the vendor shareholders have not sold all their shares to the EOT, so that they continue as minority shareholders, as well. While there is no obvious tax abuse in this, it’s clear that the legislation was intended to provide an exemption from capital gains tax when a controlling interest was sold to a trust, so if the same people remain as both directors of the company and trustees of the trust, one could argue that they haven’t really ceded control to the trust. This area was also covered in the CIOT submission on EOTs. I would note that, in the cases I have dealt with, the normal structure is for one of the vendors shareholders to remain a director of the company and to be a trustee of the trust, but I encourage my clients to appoint an employee director and trustee, often the same person, as well as an independent director and trustee. Best practice also suggests that there should be some form of employee council, although not every vendor that I have dealt with has chosen to go that far.

I may cover some of the more technical aspects of sales to an EOT in later columns. Meanwhile, for those who are interested in reading a little bit more about employee ownership, you might want to read the article by Graeme Nuttall, ‘An introduction to the employee ownership trust’ (via, or have a look at the Employee Ownership Association website (