Employee ownership trusts – an IHT winner from the Budget

Some business owners may still be in denial about the Autumn Budget changes to inheritance tax (IHT) reliefs. Given the spotlight has shone so brightly on the plight of farmers, there could also be some business owners who do not fully appreciate that the proposed IHT changes will apply equally to them. 

Similarly, employees at privately owned businesses may not realise that these IHT changes could have an impact on their job security in the future. From 6 April 2026, the changes to business relief mean that the death of a business owner may trigger a large tax liability. This in turn may result in a burden being effectively shouldered by the business unless appropriate planning has been put in place beforehand.

When it comes to Christmas functions next year, a staff toast to the good health of the shareholders could become a common occurrence. Instead of turkey with all the trimmings, bosses may be surprised by the serving of festive superfood salads at the top table.

Common options that are likely to be explored to deal with this will include life insurance cover and the earlier sale or gifting of shares and business assets. One option that may not currently feature on business owners’ agendas is a sale to an employee ownership trust (EOT). 

In part due to the wider economic picture, it has been harder for some businesses to find an external buyer or investor and EOTs have become more popular as a result. Inadvertently, Rachel Reeves may have made them even more popular in her Budget.

Whilst other shareholders may need to concern themselves with business relief, EOTs do not. They can benefit from a special IHT exemption that is available to trusts set up for the benefit of employees. Unlike other trusts which can be liable to IHT, it is possible for an EOT to completely avoid any IHT liabilities on the assets it holds.

As you might expect, there are various conditions that must be met in order for an EOT to enjoy this IHT advantage. An important one is that the trust must be for the benefit of all or most employees, not just a certain proportion of them.

There may still be an exposure to IHT for the selling shareholder, indeed it might be higher than it was before as they will have disposed of shares that may have qualified for at least some IHT relief. However, they will now often have cash or a debt due to them which could be easier to gift to others or indeed to spend, often an underrated IHT mitigation strategy. 

An EOT transaction is not something to be rushed into and certainly not solely for tax reasons. However, knowing that the business’s future is secure from an unexpected IHT burden could make this ownership model even more appealing.