My VIP Tax Team question of the week: Employee Ownership Trust Funding
My client is a sole director/shareholder of a trading company and is considering his future retirement options. My client would prefer to sell the shares to his employees, but this is unaffordable for them. Even if some shares were issued to interested employees, perhaps under an EMI scheme, the company would still not be able to afford a Purchase of Own Shares. Therefore, I have been considering the possibility of an Employee Ownership Trust – especially in view of the CGT benefits for my client. My client has mentioned he would be prepared to wait for the consideration to be paid over a period of time, but I am confused as to the best way for the EOT to fund the purchase of the shares.

I would not rule out the option of a Management Buyout whereby interested key employees could set up a new company to acquire the existing company shares with payment being made over time. However, this would not have the CGT benefits for your client that are available with a share purchase by an EOT. Stamp Duty will be payable on the share purchase as it will be by the EOT.

As regards funding the EOT, I understand that the most popular means is via “capital contributions” by the company.

The payment of dividends would be chargeable on the EOT at the trust rates of tax meaning HMRC would get a large slice of such dividends leaving less income for the trustees to accumulate and repay their indebtedness to your client.

Assuming a loan from the bank could be negotiated, how would the trustees be able to meet the loan repayments? A similar issue arises if the company makes a loan to the EOT but with the added problem that this also gives rise to a loan to participator charge on the company (s455(1)(b) CTA 2010 – see CTM61525).

A “capital contribution” could in fact be a distribution within s1000 or s1020 CTA 2010 and so chargeable to income tax on the trustees under s383 ITTOIA 2005 at the trust rates of tax. However, it is understood that if a non-statutory clearance application is made to HMRC, they are prepared to give a ruling that such a contribution would not be treated as a taxable distribution providing it does no more than cover the cost of the share acquisition (including the Stamp Duty). Any excess is treated as a taxable distribution under s1020 CTA 2010. An argument could be made that other contractual administrative costs of the trustees met by such contributions should also not be treated as a distribution. However, this is something that will have to be agreed with HMRC as part of the clearance application. Be careful not to fall into a potential trap whereby regular fixed capital contributions are made as these could be deemed to be “annual payments” under Chapter 7 Part 5 ITTOIA and so taxable income of the EOT trustees and requiring basic rate tax deduction by the paying company (Chapter 6 Part 15 ITA 2007). There is no close company IHT charge on such capital contributions owing to the exemption in s13A IHTA 1984.

This is an unsatisfactory state of affairs and was the subject of a submission by the CIOT last year.


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Tax Consultant
0844 892 2470

David started his tax career with the Inland Revenue and then moved into practice with responsibility for the tax department of a mid-size practice. David has experience of dealing with, amongst other things, trusts and estates, HNW individuals, non-residents and both OMBs and large companies. He is qualified with the Association of Taxation Technician.

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