The government's first proposal concerns business transfers. From April 2014, full capital gains tax (CGT) relief will be available when shares are disposed of to a qualifying employee ownership trust (EOT), provided that the disposal contributes to the EOT owning a controlling interest in an employing company. There are various conditions which are designed to target the relief appropriately and to reduce the opportunities for tax avoidance, namely:
- The EOT must not at any time before the start of the tax year in which the disposal occurs have had a controlling interest in the relevant company.
- The EOT must have a controlling interest in that company at the end of that tax year.
- The company (or its group) must be trading and must continue to do so until the end of that tax year.
- Neither the transferor nor a person connected with the transferor has in a previous tax year disposed of shares in the company or a group company.
- Either the transferor must not at any time in the previous 12 months be a substantial participator (broadly, a person with an interest in at least 5% of the company) or fewer than two-fifths of the employees and officeholders in the company must be substantial participators immediately after the disposal.
- The EOT must operate for the benefit of all eligible employees on the same terms.
The relief operates as if the disposal is made for an amount which gives neither a gain nor a loss to the transferor. If the EOT ceases to control the company or ceases to be a qualifying trust, the EOT trustees will be deemed to have disposed of and reacquired the shares at the then market value, and gains realised on such deemed disposal will be chargeable to CGT.
This initiative opens up attractive new opportunities for those advising clients on succession planning
This initiative opens up attractive new opportunities for those advising clients on succession planning, particularly since the government also proposes to improve the inheritance tax (IHT) regime for employee benefit trusts (EBT). Some existing EBTs will not automatically meet the EOT requirements. If an EBT wishes to qualify as an EOT, the trustees will need to amend the terms of the trust deed or resettle property in a new trust. Qualification as an employee trust for IHT purposes will mean that the tax charge every 10 years which otherwise applies to discretionary trusts is avoided, as well as exit charges when trust property is distributed.
The governments second proposal concerns tax-free bonuses. From October 2014, a company controlled by an EOT which meets the qualifying conditions can pay its employees cash bonuses of up to 3,600 per tax year which will be exempt from income tax (although not from National Insurance Contributions). The government has increased the funding available for this initiative from the originally proposed 50m per annum to 70m per annum. The qualifying conditions are:
- The company paying the bonus must be controlled by an EOT throughout the qualifying period (normally, the 12 months prior to payment).
- The employees must be eligible to receive a bonus payment on equal terms (although a company can be allowed to exclude employees with less than 12 months service). This condition permits bonuses to vary by reference to a percentage of salary, length of service or hours worked. Payments cannot, however, be used to reward particular groups of employees disproportionately.
To counter possible tax avoidance, the government has stressed that the exemption will not be available for a bonus paid under salary sacrifice arrangements.
These initiatives are to be warmly welcomed. They make available attractive alternative strategies for businesses considering ownership succession. The government believes that UK business will benefit from a growth in the number of employee-owned companies. If its objective is to be achieved, it is essential these two new reliefs are not treated purely as tax planning opportunities, but that careful thought is also given to creating practical and sustainable employee ownership structures.
Stephen Chater is share plans director at Postlethwaite Solicitors Limited