New reliefs for employee-ownership trusts

Employee-ownership trusts (EOTs), broadly trusts that own at least a simple majority of a company’s shares for the benefit of all its employees, are even more attractive as a result of new tax reliefs introduced in 2014/15.

CGT and IHT reliefs from 6 April 2014

CGT and IHT reliefs will apply when shares that give control of a trading company or holding company of a trading group are transferred into a qualifying trust by:

  • individuals;
  • trustees.

Transfers by individuals, trustees and close companies may be exempted from CGT and IHT. The CGT rule that would otherwise treat the gift as a sale for market value will be specifically disapplied. The exemption can only apply to a transferor who has not made an eligible transfer before and the EOT must control the company at the end of the year in which the transfer is made.

Income tax relief for bonus payments to employees from 1 October 2014

Income tax relief will apply to “relevant bonus payments” of up to £3,600 per annum paid to employees of companies owned by EOTs. Bonus payments need not be in a single annual lump sum and may be flexible to take account of remuneration level, length of service and hours worked. A corporation tax deduction will be available for these bonuses, not withstanding that they are exempt from income tax. Note that there is no exemption from National Insurance so employer and employee NIC is still levied when the bonus payments are processed via payroll.

Settlements that qualify for relief

A settlement may be made up of more than one trust but none of those trust(s) may permit:

  • any of the settled property to be applied otherwise than for the benefit of all eligible employees on the same terms;
  • any of the settled property to be settled on any other trust, either by transfer to an existing trust or by creation of any sub-trusts; or
  • any loans to beneficiaries.

Transitional rules will apply to enable existing employeebenefit trusts (EBTs) to qualify.

EOTs will be able to make appointments to charity, to an employee’s widow or widower or by reference to an employee’s remuneration, length of service or working hours.

Eligible employees

All employees of a qualifying trading company or holding company of a trading group are eligible apart from “excluded participators”:

  • holders of or who are entitled to acquire or receive 5% or more of the company’s share capital, any class of the share capital or the company’s assets in a winding up;
  • participators member companies of a group of which the EOT-owned company is the parent;
  • participators in a close company which has transferred property to the trustees of the settlement where the transfer was exempt as a transfer for the benefit of employees;
  • any other person who has been a participator in the company or group members in the ten years before the disposal to the EOT and where relief was claimed on that disposal; and
  • any person connected with such any of the above persons.

For more information about the new employee ownership reliefs, please contact Liz Hunter