Entrepreneurs who give away their businesses to their employees face a tax freeze under new government proposals.
HM Treasury has launched a consultation on employee ownership trusts (EOTs) after they were found to be used for “unintentional tax planning”.
These trusts allow entrepreneurs who donate at least half of a company to employees to reap significant tax benefits themselves
This form of shared ownership has become popular in recent years, most notably when Richer Sounds founder Julian Richer transferred control of his hi-fi and TV retail chain to staff in 2019.
Under an EOT, those distributing the stock are exempt from the capital gains tax, while the company can pay its employee bonuses without paying income tax.
But the Treasury consultation – due to be released later this year – could mean that the tax breaks will be cut or scrapped altogether.
The Treasury said the consultation would aim to “ensure that the exemptions are closely focused on promoting EOTs as an employee-owned business model while preventing the exemptions from being used for unintentional tax planning”.
Tim Stovold of accounting firm Moore Kingston Smith said the government was likely concerned about abuse of the system.
He said: “If an employee’s trust is placed in a tax haven, or if the trust resells the company, no tax is paid – and it wasn’t meant to be.”
Employee trusts were introduced to improve employee productivity, Mr. Stovold said: “If an employee owns a part of the company, they are invested in the company’s success.”
However, Mr Stovold warned that plans to limit the tax breaks would discourage entrepreneurs from using this trust scheme in the first place. He said some business owners would rush the scheme before tax laws are changed.
He said, “The worst thing that can happen to a tax cut is that it becomes popular.”
The Ministry of Finance has been contacted for comment.
