What follows may be of interest (only) to those who advise in relation to the establishment and operation of “employee ownership trusts” (or “EOTs”).
Non-corporate shareholders who sell shares in a trading company or holding company of a trading group (“C”) to an EOT may claim relief from capital gains tax if all the relief requirements are satisfied. The Finance Act 2025 made a number of changes to the requirements as they apply to EOTs to which disposals are made on and after 30th October 2024, including an entirely new “trustee independence requirement” which must now be met.
HMRC have acknowledged that there is an error in the drafting of the new “trustee independence requirement”. Read literally, no trustee of an EOT (“T”) would satisfy the new requirement. This is because T will always be an “excluded participator” (as specially defined) and the requirement is not met if half or more of the trustees are such “excluded participators”. But there is good news.
For the purposes of this requirement, an “excluded participator” has the meaning given in s236J TCGA 1992, but does not include a trustee who is so excluded only by reason of its deemed connection (per s286(3)) with the settlor.
Looking at the definition of “excluded participator” in s236J: in every EOT situation, T, as a holder of shares, is a participator in C. However, a participator is not an excluded participator if T holds shares in C only in a fiduciary capacity (see s236J(6)(a)) and is not entitled to more than 5% of assets of C on a winding-up (s236J(6)(b)). The problem is the absence, from s236(6)(b), of the words “…beneficially entitled to…”. T will be legally, but not beneficially, entitled to more than 5% of assets on a winding-up of C. T is therefore an “excluded participator” as defined in s236J.
Until the new requirement was introduced from 30th October 2024, this did not matter.
Looking at the exception, in new s236LA(2)(a), to being an excluded participator as defined for the purposes of the new “trustee independence requirement”, T is not “an excluded participator only as a result of a connection falling within section 286(3)”. T is an excluded participator by virtue of being entitled to more than 5% of assets on a winding-up, per s236J(3).
On a literal reading, trustees could never meet the “trustee independence requirement”.
The good news is that HMRC have confirmed that, adopting a “purposive approach”, as this is clearly not what was intended, HMRC would not seek to argue that trustees would be considered excluded participators in such circumstances. In other words, s236J(6)(b) will be read and construed as if it said that excluded participators do not include any participator not beneficially entitled to 5% or more of any class of shares and who “on a winding up of the company would not be beneficially entitled to 5% or more of its assets”.
Separately, HMRC have confirmed that the new trustee independence requirement will not preclude the use of a corporate trustee with a share capital, the shares in which are owned by C (affording a circularity of ownership: C owns T, which owns C).
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24th October 2025
David Pett, Tax Barrister 