The Treasury is expected to clamp down on the sale of companies to employee-owned trusts in next month’s budget.
The Times reports that this may include banning offshore trusts and requiring former owners to relinquish control.
However, tax advisers say the chancellor is likely to stop short of capping the capital gains tax relief available under the trusts.
The unlimited tax break on the sale of businesses to their employees was granted in 2014 during the coalition government as part of a push by the Liberal Democrats to create a more “John Lewis economy”.
Since then the number of business owners selling to their staff has increased more than tenfold, with a further 37% leap in new registrations in the year to last April. The Employee Ownership Association says the total now stands at more than 1,600.
Well-known names include Richer Sounds, the electronics retailer, Aardman Animations, the film company behind Wallace & Gromit and Chicken Run, and Go Ape, which operates tree-top adventure parks.
The chief tax benefit is that business owners can avoid paying capital gains tax, typically 20%, at the point of sale. They have to sell at least 51% of the business to an employee ownership trust at the going market rate.
Trusts usually pay the seller the agreed price over several years from the taxed trading profits of the company. The capital gain tax liability shifts to the trust, which has to pay up if the business is sold later on. Employees benefit because the trust structure allows them to collectively purchase the company without incurring any personal cost or risk.
HM Revenue & Customs consulted on a series of proposed reforms last autumn to tackle certain abuses of the scheme.
The Treasury said it was “carefully considering” the responses to the consultation and that “a response will be published in due course”.