Tax-Efficient Restructure and Family Wealth Planning
Introduction
Our client, the owner of a successful group of businesses, received an offer to sell the entire issued share capital of their main trading company for approximately £4 million. With no immediate need for the sale proceeds, they sought to reinvest the funds for the long-term benefit of their family in a tax-efficient manner.
The group structure included a trading company with around £2 million in cash reserves, a subsidiary generating approximately £500,000 in annual turnover, a property company holding investment and operational properties, and a separate LLP used to contract with clients. Staff were employed through a management company, and shares were held by both the property company and family members.
The client’s goals were to extract value from the business efficiently, ensure the sale would qualify for Substantial Shareholding Exemption (SSE), and explore estate planning options, including potential IHT mitigation through trusts.
The Issue
The primary objective was to restructure the group to allow the sale of the business in a way that would qualify for SSE, avoiding corporation tax on the gain. At the same time, the client wished to release and reinvest the group’s retained profits, particularly into the family’s property company, without incurring unnecessary tax charges. Given the group’s operational and ownership complexity, there were multiple considerations, including goodwill treatment, shareholding structure, and future IHT exposure.
Our Solution
We advised our client to hive down the trade and assets of the main company into its wholly owned subsidiary. This would allow the parent company to dispose of the subsidiary while qualifying for SSE, assuming all relevant conditions were met.
We confirmed SSE should be available, as the subsidiary was trading and wholly owned. We also reviewed the correct accounting treatment of goodwill and ensured that the hive-down transaction would not trigger anti-avoidance provisions, provided the sale occurred in line with the timeline and substance requirements.
Practical challenges, such as the involvement of the LLP, the VAT group, and the employment structure, were addressed to ensure a clean transfer of operations into the subsidiary. After the sale, the parent company would declare a significant dividend, expected to be £5–6 million, to the property company. These funds could then be reinvested into additional property or other assets for the family’s benefit.
In parallel, we reviewed the client’s IHT position and advised on the potential use of family trusts and other planning tools to reduce exposure, preserve wealth, and ensure long-term succession planning.
The Outcome
The restructure enabled our client to qualify for SSE, allowing for a tax-efficient disposal of the subsidiary. The dividend strategy provided a clean and efficient way to move profits into the property company for reinvestment. Our IHT advice laid the groundwork for future planning and asset protection.
Overall, our client achieved a simplified exit, efficient profit extraction, and a clearer path toward multigenerational wealth preservation.
A tribunal decision has compelled HMRC to disclose whether it relies on artificial intelligence (AI) in processing research and development (R&D) tax credit claims, raising fundamental questions about transparency, accountability, and fairness in government decision-making.
The First Tier Tribunal’s ruling in Thomas Elsbury [2025] UKFTT 915 (GRC) follows HMRC’s refusal to confirm or deny its use of AI, citing exemptions under the Freedom of Information Act. The tribunal found this stance untenable, warning that secrecy undermines public trust and risks deterring legitimate claimants.
Judge observations pointed to signs of automated involvement, such as correspondence containing American spellings, suggesting machine-generated language may have been used. The ruling emphasised that concealment of AI in high-stakes assessments threatens confidence in the tax system and could frustrate the policy aims of the R&D scheme.
Transparency, accountability, fairness under the microscope
The decision brings three key risks of government AI use into sharp relief:
Transparency: Failure to disclose AI use leaves taxpayers uncertain about how critical financial decisions are made.
Accountability: Concerns were raised that HMRC officers may be informally using AI tools without oversight, creating gaps in governance.
Fairness: Unlike human assessors, AI often operates as a “black box,” making it harder for claimants to understand decisions or mount effective appeals.
Implications for R&D claimants
For businesses seeking R&D tax relief, this ruling is both a safeguard and a warning. On one hand, companies now have stronger legal grounds to demand clarity over whether AI influenced their claims. On the other hand, the judgment reveals that some claimants may already have been subject to automated processing without their knowledge.
Given HMRC’s intensified scrutiny of R&D claims, highlighted by a 23% year-on-year fall in SME applications as of September 2024, the potential use of AI raises further concern. If automated systems reject claims without grasping the nuances of innovation, genuine projects could be unfairly dismissed, discouraging startups and scale-ups from applying altogether. These risks undermine the scheme’s original purpose: to stimulate UK innovation.
AI’s own view of its limits
When asked to reflect on its suitability for tax assessments, one AI system admitted serious shortcomings: a lack of contextual understanding, susceptibility to data bias, and opacity that complicates appeals. While AI can improve consistency and efficiency, it cannot replicate the nuanced judgment required for complex R&D determinations. The system itself recommended “human-in-the-loop” models where technology assists but does not replace human decision-makers.
Beyond HMRC: wider lessons for government
The Elsbury ruling sets a precedent that could extend across public administration, from welfare benefits to planning and licensing. It confirms that government departments cannot rely on secrecy when AI is used in decisions affecting citizens’ rights and livelihoods. Courts are willing to intervene where safeguards are absent.
This points to an urgent need for a robust AI governance framework in government covering disclosure, oversight, and appeal mechanisms. Without these, automated decision-making risks eroding trust in public institutions.
Looking ahead
AI should play a supporting role in government administration, not a decisive one in matters with significant financial or personal impact. For HMRC and beyond, the path forward lies in transparent disclosure, clear accountability, and models where humans remain firmly in control.
AI in the tax industry more broadly
The tax industry is increasingly exploring AI applications beyond R&D relief processing. AI is already assisting with fraud detection, data analytics, and compliance monitoring, offering potential benefits in efficiency and consistency. However, the challenges highlighted in this ruling echo across the sector:
Complexity of tax law: AI struggles with interpreting nuanced legislation and case-specific contexts, areas where human expertise remains indispensable.
Risk of bias: Training data may embed systemic biases, leading to unfair outcomes in tax assessments or audits.
Trust and transparency: Taxpayers must have confidence in the integrity of the system. If decisions appear to be outsourced to opaque algorithms, public trust could erode rapidly.
Opportunity for augmentation: Properly designed, AI can serve as a powerful tool for human tax professionals by flagging anomalies, analysing large datasets, and streamlining routine checks while leaving judgment calls to trained officers.
In short, AI’s future in tax lies not in replacing human judgment but in enhancing it. Governments and firms alike must prioritise oversight, disclosure, and accountability to ensure AI supports, rather than undermines, the fairness and legitimacy of tax administration.
Employee Ownership Trust (EOTs): What Happens Next?
Introduction to Employee Ownership Trusts (EOTs), what happens next…
Employee Ownership Trusts (EOTs) are increasing in popularity, and it’s not hard to see why: the founders sell (with no tax to pay), the employees inherit an indirect stake in the business, and everyone celebrates with cake!
But what happens next?
As employee ownership is still a relatively new concept, having only been widely talked about since 2014 it’s fair to say that this is still relatively unexplored territory.
Indeed, whilst sales to EOTs continue to gain publicity, with The Entertainer becoming one of the most recent well-known names to announce it is moving to employee ownership, there appear to be few, if any, well-publicised examples of EOT-owned businesses being sold.
Whilst it is, of course, possible for the EOT to sell the shares it owns in a trading company, in practice, it’s likely to be rare given the commercial complexity and the need to consider employee interests.
However, businesses will evolve, markets will shift, and shareholders’ (including EOTs needs will change. So, how could it work?
That would largely depend on the original situation on sale to the EOT and whether it was:
A complete sale of 100% of the shares to an EOT
A partial sale (anything between 51% and 100%) where the selling shareholder retain an interest in the company; and
More complex hybrids, such as an EOT combined with a share option scheme
Each brings its own commercial and tax considerations, and we have explored these below.
1 When All Shares Are Sold to the EOT
Where 100% of the shares are transferred, the trustees hold them on trust for the employees. At that point, the company is “locked into” the employee ownership model.
Resale: A later trade sale isn’t impossible, but it must be justified as being in the employees’ best interests. Independent trustees, in particular, may be reluctant to sell unless the rationale is compelling.
Other challenges: second-tier management may feel disincentivised as high earners are unlikely to be excited by tax-free bonuses of £3,600 per annum and we have seen examples of these individuals deciding to leave once EOT sales complete, realising that there is no longer much in it for them. The concern there is that once the original shareholders have left the business day-to-day, the only way to truly incentivise future generations of managers and leaders is with large salaries.
Tax considerations
The initial sale will qualify for a capital gains tax (CGT) exemption if all statutory conditions are met. However, if the company is later sold to a third party, that transaction is treated as a disposal by the trust itself. The EOT is subject to CGT (albeit with possible exemptions if it still qualifies as an employee benefit trust). Care is also needed with distributions, as payments to employees will fall within income tax rules and the after-tax proceeds would then be subject to income tax and national insurance when distributed to the employees.
2 When a Majority Interest Only Is Sold
EOT legislation requires that the trust owns a controlling interest (more than 50%). But that still allows founders or investors to retain a minority stake.
Resale: In this case, the trustees and the continuing shareholders sit side by side so all would have to agree to sell.
Other challenges: problems night arise if the founder later wants to sell their minority holding. The trustees may be unwilling or unable to buy, and third-party buyers may not want a minority stake. Additionally, minority stakes are typically worth less per share than majority holdings, so exit expectations need to be managed.
This hybrid approach can work where the founder wants to stay engaged and share in future growth, but it complicates the long-term succession picture.
Tax considerations
The founder’s initial sale of a majority interest can qualify for the CGT exemption, provided the trust meets the statutory ownership and employee benefit requirements. If the founder later disposes of their retained minority stake, this will be taxed under normal CGT rules, with no special relief as there is only one “bite at the cherry”. In addition, there is a risk that if the founder’s continuing role or benefits are too generous, HMRC could argue that the EOT does not meet the “all-employee benefit” condition, jeopardising the CGT relief on the original transaction so care needs to be taken.
3 EOTs Combined with EMI Options
Some businesses adopt a hybrid model such as ownership through the EOT, alongside Enterprise Management Incentive (EMI) options for key (second-tier) management. This can work well as it rewards all employees equally while still giving senior staff an extra incentive.
Resale: on a second exit, option holders expect to realise value. But if the trustees are reluctant to sell, there is a potential conflict between management’s desire to crystallise their options and the trust’s duty to employees.
Other challenges: EMI options can be very tax-efficient, but care is needed to ensure compliance with the “equality requirement” for the EOT. The EMI scheme cannot undermine the principle of broadly equal treatment. Additionally, aligning the voices of trustees, option holders, and ordinary employees can be tricky.
This structure offers flexibility but requires careful drafting of trust deeds, option terms, and shareholder agreements to avoid future stalemate.
Tax considerations
An EMI scheme is very tax efficient because qualifying option gains can benefit from Business Asset Disposal Relief (BADR) even if the option holder holds less than 5% of the ordinary share capital and voting rights shares. However, as outlined above combining an EMI with an EOT requires careful planning to ensure the trust’s “broadly equal” benefit test is not undermined by the EMI favouring only senior staff. On a second exit, EMI option holders may trigger CGT at exercise/sale, while the EOT itself may face CGT on any share disposal. In addition, corporation tax deductions may be available for option gains, but the interaction with EOT rules must be managed to avoid double-counting or disallowance.
Conclusion
The first sale to an EOT may not be the end of the story. Once the cake is eaten, the business continues to evolve. Owners, trustees, and employees should recognise that.
In summary:
100% EOTs bring stability but limit flexibility for future sales, with the trust itself bearing tax on a later disposal.
Majority EOTs with retained minority shareholders create scope for continued involvement, but the minority stake will not enjoy special tax relief and can create tension.
EOTs with EMI overlays provide a nuanced blend of broad participation and management incentive, but raise complex interactions at the second exit around CGT, income tax, and corporation tax.
EOTs are powerful vehicles if done right, but they require careful planning.
Businesses whose main drivers are tax relief or short-term exit may find themselves better served by alternatives such as trade sales or MBOs. Don’t let the tax tail wag the dog!
If you have any queries about this article or employee ownership, please get in touch.
Employee Ownership Trusts (EOTs) have become a familiar feature of the UK business landscape since their introduction in 2014. They are often promoted as a great solution to succession planning, offering tax advantages for the selling shareholder and engagement benefits for employees.
But as with any structural change, the real question is not whether you can establish an EOT, but whether you should.
Suitability depends not just on the financials, but also on culture, governance, and long-term goals. Some businesses thrive under employee ownership. Others find the model an uncomfortable fit.
At its core, an EOT is funded out of future profits. The selling shareholder typically receives a combination of an upfront payment (sometimes funded by third-party debt) and deferred consideration, repaid over time from the company’s cashflow.
This means the business needs to be financially stable, which includes:.
Consistent profitability – a business with erratic earnings or losses will struggle to meet repayment obligations.
Good balance sheet health – but solvency alone isn’t enough. The key test is whether free cashflow is sufficient to support the EOT deal.
Valuation realism – if the shareholder’s expectations are out of line with what the business can genuinely afford to fund, the model will not work.
The right motivation
Numbers aside, the owner’s motivation is a central factor in any EOT transaction. For this reason the EOT model is well-suited to shareholders who:
Wish to secure succession while maintaining continuity of the business.
Value legacy, culture, and employee welfare alongside personal exit goals.
Are comfortable with a staged repayment rather than a clean break.
Where the driver is solely tax relief, the structure can unravel. Employees may view it with scepticism, and trustees may find themselves holding an ownership interest without genuine engagement from staff, which brings us to….
Good employee engagement and a great culture
Employee ownership thrives in businesses with a collaborative culture. High staff turnover, weak morale, or a culture of mistrust are not a great start. Equally, if the business is overly reliant on the founder, employees may not be ready to step into a more empowered role.
Strong candidates for EOTs tend to have:
A committed second tier of management capable of running operations.
A culture where employees already feel valued and listened to.
A workforce size large enough to make shared ownership meaningful, (as to which see below)
Comfortable with governance and administration
An EOT is not administratively easy. Trustees (including independent representatives) must oversee the trust, annual valuations are needed, and reporting obligations are significant. There may also be employee councils or forums to ensure genuine representation.
Businesses with a clear governance structure and a willingness to embrace this are far better placed than those which have historically operated informally.
Prepared for a long-term commitment
Unlike a trade sale or management buyout, an EOT is not designed to be unwound easily.
Once in employee ownership, the expectation is permanence. That makes it vital to consider whether the model fits the long-term brand and strategic direction of the business. For some sectors, typically but not exclusively professional services, creative industries, and knowledge-led businesses, the alignment can be natural. For others, particularly those with heavy capital requirements or volatile markets, the fit may be less obvious.
So, what is the ideal size for an EOT?
This is a question we get asked a lot.
Whilst there is no statutory minimum size for an EOT, in practice the model works best at a certain scale.
Employees:
At least 10–15 employees, often 20+, so that the benefits of employee ownership are spread across a meaningful group. Equally, if the majority of employees are directors or family members, the “equality requirement” under s236M CTA 2010 can be compromised. HMRC expect broad-based participation, not just a handful of “insiders” who benefit. Additionally, if too high a proportion of the employee base are directors or participators, the arrangement risks looking like a disguised management buyout rather than a genuine EOT. This might even mean that the selling shareholders do not obtain capital gains tax relief as they had anticipated.
Turnover and Profitability:
Businesses with a reasonable turnover (likely at least in the low millions) and steady, predictable profits are often the best fit. Small companies with thin margins may not generate enough free cashflow to fund the EOT, while very large companies may need a more formalised governance structure to manage the complexities of employee ownership. A certain size is also critical to fund the costs of the transaction itself, such as the costs of obtaining professional advice, which are not to be underestimated if dealt with properly.
What if having read this I think an Employee Ownership Trusts (EOTs) might not be right for me?
For some businesses, an EOT is not the right answer. That doesn’t mean, of course, that there are no other options for exit.
A trade sale can be attractive where a strategic buyer is willing to pay a premium.
A management buyout (MBO) works well if there is a strong leadership team eager to take control; and
Family succession remains viable where the next generation is engaged, although can brings its own tax complexities.
Finally, in certain cases, hybrid solutions, such as selling part to an EOT and part to investors, can balance legacy with liquidity.
The important thing to recognise is that one size does not fit all. The right structure is the one that aligns with both the financial realities of the business and the legacy its owners wish to leave.
Conclusion
An EOT can be a powerful succession and exit planning option where the business has:
Sustainable, predictable profitability.
A realistic valuation and funding model.
A supportive culture and strong second tier of management.
Owners motivated by legacy and employee welfare, not just tax.
But not every business is an ideal candidate for an EOT. Companies with unstable cashflow, weak management depth, or disengaged staff may find the model a poor fit. Where those factors apply, exploring alternatives such as trade sales, management buyouts, or family succession may be a better option.
If you have any queries about this article on employee ownership or would like to receive a copy of our factfind, which might help you start to understand whether employee ownership might be right for your, or your client’s business, please get in touch.
Case of the month – Succession Planning for a Family-Owned Business
Introduction
Our clients, a married couple in their late 60s, wished to start passing ownership of their successful family business to their children during their lifetimes to avoid potential disputes after their deaths.
While they were happy to hand over control, they wanted to retain some influence to help guide the company when needed. Their priority was ensuring the process was completed in the most tax-efficient way possible.
The Issue
The clients were concerned that, even with clear wills, future disputes over ownership could arise. They wanted to transfer ownership to their children now while maintaining a role to support the business where appropriate.
Additionally, the company wished to incentivise certain existing shareholders by enhancing their share rights.
How we solved it
We provided detailed advice on reorganising the company’s share capital. This involved a combination of share buybacks, gifts, and new share issues — all carefully structured to maximise available tax reliefs and minimise exposure to IHT, CGT, IT and CT.
We outlined a clear, step-by-step plan for implementation, worked closely with the clients’ solicitors, and advised on creating a Non-Executive Director (NED) role to preserve the clients’ influence where needed.
The outcome
The clients successfully transferred control to their children in a fully tax-efficient manner while retaining an appropriate NED role.
They gained complete clarity on the tax implications and confidence in the robustness of the structure. Key employees were also incentivised through enhanced share rights.
The project was delivered successfully, with close coordination between advisers to ensure all compliance and legal requirements were met.
Big changes are coming to the way people pass on their wealth, and if you’re still planning to leave everything in your will, it might be time to think again. In this article, we explore whether family investment companies are the new trusts.
Should we be passing on assets sooner rather than later
The Autumn 2024 Budget has shaken things up. Changes to Inheritance Tax (IHT), especially around business property relief, have prompted many families to ask, ‘Should we be passing on assets sooner rather than later?’ For a growing number, the answer is yes – but only with the right strategy in place.
Trusts were the go-to option
For years, trusts were the go-to option for transferring wealth. They allowed parents to gift assets while retaining a level of control. But following a series of tax changes, trusts have lost some of their appeal. Larger gifts into trusts can now trigger an immediate 20% IHT charge, a steep cost for families trying to preserve wealth.
That’s where Family Investment Companies (FICs) come in. These private companies are set up to hold long-term family assets such as shares, savings, or property. The clever part? Children can hold shares or loans in the company, giving them future benefits, while parents stay in control. They retain decision-making power, manage investments, and decide when (and if) money is paid out. This structure also allows families to build in safeguards against divorce, poor financial decisions, or simply the risks of handing over too much, too soon.
In short, you can pass on wealth without losing control and without the fear of it being blown on a sports car the next day.
Family Investment Companies can be efficient too!
From a tax perspective, FICs can be efficient too. Value gradually shifts out of the parents’ estates, reducing potential IHT exposure, but without the immediate 20% charge trusts can trigger. And because FICs are companies, income (like dividends) is often taxed at lower corporate rates, which can be far more favourable than personal tax rates.
No structure is perfect
Of course, no structure is perfect. FICs do come with administrative responsibilities and require careful setup, especially if the company owns shares in a trading business. The rules can be complex, and expert advice is essential.
Greater tax savings over the longer term.
Still, for families thinking long-term, FICs could be the missing link in a modern, flexible approach to wealth planning. They offer a powerful mix of tax efficiency, control, and structure, helping families grow and protect wealth across generations. In some cases, establishing a FIC alongside family trusts can achieve even greater tax savings over the longer term.
Thinking of taking action? Now is the time to explore your options.
Next Steps
Contact ETC today to discuss how we can support you, your children, and even future generations. The sooner you start, the more opportunity you’ll have to plan smartly and maintain wealth.
