The Government has announced an immediate change to capital gains tax (CGT) relief on disposals to employee ownership trusts (EOT), reducing the relief from 100% to 50%. That means CGT at 12% instead of 0% previously. However, other benefits remain in place.

Chris Etherington, tax partner at RSM UK comments: “The reduction in tax relief on the sale of businesses to Employee Ownership Trusts is likely to slow the pace of change to this ownership model, just when it had started gaining some real momentum. The government’s reasoning seems solely based on the rising cost to the Exchequer.”

Despite the reliefs being in place since 2014, business owners have become more interested in this ownership model in the last five years. This has been aided by some high-profile examples of successful employee-owned businesses, proving the concept to others.

It is, however, clear that tax incentives have played a part in the take-up of employee ownership, particularly following the changes to Entrepreneurs’ Relief in 2020.

Clearly any tax relief needs to be balanced against the economic cost to the Exchequer and it’s possible the forecasts may have come as a surprise to Treasury officials. Before this change, forecasts indicated the relief could cost £2bn by 2028/29, which is around 20 times higher than the original estimates when the measure was introduced. In short, it would seem the Government believes the current level of relief being claimed is unsustainable and has acted to curb its fiscal impact.

Chris continues: “It is perhaps surprising to see the Government act so swiftly to reduce the relief, before it has been able to fully assess its impact on the economy, given that employee-owned businesses can have higher levels of productivity.”

Although the relief has been reduced, selling to an EOT continues to remain a highly attractive succession route for both shareholders and employees:

• an effective maximum 12% CGT rate on a disposal of shares to an EOT,
• an opportunity to withdraw from a business on your own terms,
• tax free bonuses for employees,
• whilst also offering cultural benefits to businesses.

Research consistently highlights the positive impact of employee ownership, including that employee-owned businesses can outperform others by 8 to 12%. It is also widely considered that employers with employees with a stake in the business feel more motivated and committed, driving stronger engagement. Finally, employee ownership is linked to higher job satisfaction, a stronger sense of purpose, and improved organisational culture.

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