Upcoming Changes to Employee Ownership Trusts (EOTs) Explained

Tax reliefs are available for Employee Ownership Trusts (EOTs) when they buy shares in a company and meet certain conditions.

Tax reliefs are available for Employee Ownership Trusts (EOTs) when they buy shares in a company and meet certain conditions. Sometimes, the payment for these shares can be delayed and paid out of the company’s future profits through a distribution to the EOT. Until the Autumn Budget 2024, it was common to ask HMRC for confirmation that this distribution wouldn’t be taxable for the EOT trustees.

The Finance Bill 2024-25 now specifies that the amount of the distribution is reduced for tax purposes by the trustees’ “acquisition costs,” as defined by the legislation.

In December 2024, the ICAEW (Institute of Chartered Accountants in England and Wales) expressed concerns that the definition of “acquisition costs” was too narrow and could lead to unexpected tax liabilities for the trust. They noted that the current definition excluded other costs the EOT might incur when acquiring shares and managing its interest in the company.

The government has proposed an amendment to the Finance Bill 2024-25, which broadens the definition of “acquisition costs” to include:

1. Costs of acquiring the shares in the company.
2. Paying interest on loans taken for the acquisition, provided the rate is reasonable.
3. Paying stamp duty or stamp duty reserve tax on the acquisition.
4. Repaying any borrowed funds used for the acquisition.
5. Valuing the company if it relates to the acquisition.
6. Any other reasonable expenses directly related to the acquisition, excluding expenses related to the ownership of the shares once acquired.

Points 4-6 are new additions introduced by the amendment.

Richard Jones, Senior Technical Manager – Business Tax, appreciates the government’s action but believes it could have gone further. While expanding the definition of acquisition costs to include additional expenses is a positive move, the need for trustees to claim relief each year adds an administrative burden for both trustees and HMRC.

Ongoing trustee costs, such as fees for professional trustees, are now explicitly excluded from the distribution relief. This raises several questions about how these costs will be treated for tax purposes and whether non-statutory clearance applications will be required for each payment to confirm their tax status.

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