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Whilst there were many headline-grabbing tax changes under the Budget, one of those changes that has gone under the radar is the change to the rules around Employee Ownership Trusts (EOTs).

EOTs have been around since 2014, but have boomed in popularity over the past few years. They have increasingly become a legitimate exit strategy for business owners, enabling owners to pass ownership to their employees. They are also rather attractive to business owners on the basis that they benefit from 100% relief from Capital Gains Tax (CGT). In short, there is no tax payable on the transaction if the conditions are met.

Fortunately, the relief applying to EOTs has remained, with no upper limit on the amount paid for the business. However, quite sensibly, the Budget confirmed that new rules will be implemented to tighten up EOTs and avoid their potential abuse.

These tightened rules include:

• The former owners of the company (or their connected persons) cannot retain control of the EOT itself after sale. The EOT trustee must therefore be independent.
• The EOT trustee must be resident in the UK (i.e. offshore trustees are no longer permitted).
• The EOT trustee must now take "all reasonable steps" to ensure that the purchase price paid to acquire the shares does not exceed market value and that any rate of interest on deferred payments does not exceed a reasonable commercial rate.
• The clawback period in which tax relief on a sale of a company to the EOT can be recovered on a disqualifying event (i.e. the period during which the former owners are "at risk" if the EOT conditions are not met) will be extended from one year to four years after the end of the tax year in which the sale takes place.
• Directors can now be excluded from the requirement that all employees are eligible for the annual bonus (which is tax-free up to £3,600 if certain conditions are met).

Perhaps unlike other aspects of the Budget, these changes are likely to be welcomed by advisers, ensuring that legitimate EOTs remain an option for business owners. The issues which these changes are addressing were also covered in a consultation carried out by the previous Government, so there are not any major surprises.

If you are a business owner considering an EOT (or indeed, any other form of exit), the Corporate Team at Leathes Prior Solicitors has advised exiting shareholders on various types of transactions, including EOTs, and would be pleased to discuss with you further. Please contact us by email or by calling 01603 610911.