Tax planning strategy #4 – Succession planning and Employee Ownership Trusts (EOTs)

Several changes were announced in the Autumn Budget that affected business owners’ succession planning.

In this article, we’ll consider changes announced around:

• Employee Ownership Trusts (EOTs)
• IHT
• CGT
• Trusts
• Lifetime Gifts
• Pensions

Employee Ownership Trusts (EOTs)

Employee ownership trusts can be a great way to exit your business.

An Employee Ownership Trust (EOT) is a tax-incentivised scheme that transfers control of a business to employees. EOTs can motivate and retain staff and provide shareholders an exit or partial exit solution.

Employee ownership allows the share capital of a business to be partly or entirely owned by its workforce. An EOT acquires a controlling interest in a company from current shareholders. Employees don’t directly own the shares, but the shares held by the trust are used to the benefit of employees.

What were the EOT changes announced in the Autumn Budget?

The changes that were announced in the Autumn Budget 2024 and that apply from 30 October 2024 are:

• The trustees of a settlement must be UK residents.
• The trust must not be controlled by vendor shareholders or people connected to them.
• Trustees must take reasonable steps to ensure that they do not pay more than market value for the shares and do not pay more than a reasonable interest rate on any deferred consideration.
• The information required in a claim has increased to include the number of employees for claims made on or after 6 April 2025.
• Trustees can claim an exemption from income tax on distributions from the company in respect of the cost of the shares, interest and stamp duty.
• An increase to the timeframe within which relief can be withdrawn from the selling shareholders if there is a disqualifying event post-disposal (for example, a breach of the EOT conditions). The timeframe for disqualifying events has been extended from the end of the tax year to within 4 years of the end of the tax year. This change could undoubtedly affect more business owners.

Our view on EOTs

EOTs remain a tax-efficient solution for some business owners when succession planning. The Autumn Budget changes don’t dramatically affect that. The tax advantages for both shareholders and employees remain attractive.

Find out more about EOTs, their uses and their benefits here.

IHT

The changes announced in the Autumn Budget that affect the passing on of your estate are complex and far-reaching for business owners and farmers.

Changes affecting IHT in the Autumn Budget announced were as follows:

• Agricultural Property Relief (APR) and Business Property Relief (BPR) will have a combined limit of £1m. Thereafter, 50% relief applies, giving an effective 20% tax rate from 6 April 2026.
• Unused pensions will fall into the scope of IHT from 6th April 2027.
• The IHT Nil Rate Band of £325K and the Additional Nil Rate Band of £175K were frozen until April 2030.
• The rate of business property relief available will reduce in all circumstances for shares designated as “not listed” on the markets of recognised stock exchanges, such as AIM; meaning AIM shares will only get 50% relief.

Read our tips to minimise and protect against IHT here.

Capital Gains Tax (CGT)

The Autumn Budget announced a significant increase to the lower rate of Capital Gains Tax (CGT) on non-residential assets from 10% to 18% and a higher rate increase from 20% to 24% for disposals made on or after 30 October 2024.

Business Asset Disposal Relief (BADR), which reduces the effective CGT rate, will also be increasing as follows:

• Remains at 10% in the 2024/25 tax year.
• Increases to 14% for disposals made on or after 6 April 2025.
• Increases from 14% to 18% for disposals made on or after 6 April 2026.

The Chancellor confirmed that BADR’s lifetime limit of £1m would remain unchanged.

These changes may affect business owners and their decision on when they sell their business.

Read our tips to minimise your CGT liability here.

Trusts

• A new limit will apply on dispositions into trust from 6 April 2026.
• New legislation will divide relief between multiple trusts set up by the same settlor on/after 30th October 2024.
• A technical consultation is due in 2025 re: other changes to trusts.

Lifetime gifts

Where lifetime gifts are made after 30 October 2024 and the donor dies after 6 April 2026 but within seven years, the gift will be a failed ‘potentially exempt transfer’. Therefore, it will be subject to inheritance tax. If the asset qualifies for BPR, then the reduced rate of 50% will apply. Taper relief will be available where the donor has survived the gift by three years.

Failed gifts get only 1st £1m unless the donor dies before 6/4/2026.

Post 5 April 2026, failed gifts get only 100% relief on 1st £1m, subject to other conditions (donee still holds, still a qualifying company, or qualifying replacement property).

Pensions

Currently, pensions do not form part of your estate for Inheritance Tax and are, therefore, an efficient way to leave money to your beneficiaries (maybe).

If you pass away before the age of 75, your beneficiaries can access the pension free from income tax.

If you pass away after the age of 75, your beneficiaries will pay income tax at their marginal rate on what they draw down from the pension (20%, 40% or 45%)

The major change in the Autumn Budget was that pensions passed on will be subject to IHT from 2027.

This means the effective rate of tax on pensions could be up to 67% in some cases.

How does this compare to other assets?

• Let’s assume you invested £1m of cash in shares, which are worth £1.5m when you die.
• If you don’t qualify for Business Relief, the effective rate of tax is 32% (considering the free CGT uplift)
• If you do qualify for Business Relief and you have the £1m allowance, the effective rate of tax is 1.3%
• If you do qualify for Business Relief but don’t have the £1m allowance, the effective rate of tax is 12%.
• If you sell and then die shortly after (the previous winner), the effective rate of tax is 44.8%

These changes will mean a fundamental shift in how wealthier individuals decide to invest and access their money in retirement. People could potentially access pensions earlier to prevent them from being part of a later IHT bill.

How Barnes Roffe can help

We work closely with clients to support and advise them in every stage of succession planning. Here are just some of the areas that Barnes Roffe can help you:

• Succession planning advice and support
• Creating your exit strategy
• Advice on increasing business value
• Business valuation
• Business sale
• Tax planning – Including CGT, IHT, Corporation Tax and BADR.
• Identifying and approaching potential buyers
• Management buyout support
• Employee Ownership Trusts
• Trusts and IHT planning

For more help and advice on succession planning, contact us.

RELATED ARTICLES IN OUR TAX PLANNING SERIES:

Tax Planning Strategy #1: Saving Capital Gains Tax

Tax Planning Strategy #2: Reducing your IHT bill

Tax Planning Strategy #3: Tax efficient profit extraction

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