Tax reliefs are available where an EOT acquires the shares in a company and certain conditions are met. Some or all of the consideration for the shares may be deferred and paid out of the company’s future profits. To achieve this the company must make a distribution to the EOT.  

The tax treatment of this distribution has caused concern for some years. Up until the Autumn Budget 2024, it was common practice to apply to HMRC for clearance that the distribution was not taxable on the trustees of the EOT.  

The Finance Bill 2024-25 provides that the amount of the distribution is reduced by the trustees’ “acquisition costs” for tax purposes (Schedule 6, paragraph 9). These are:  

• the amount paid for the shares;
• interest payable on the deferred consideration provided this is at a reasonable rate of return; and 
• stamp duty or stamp duty reserve tax paid on acquiring the shares.   

This change in the law applies with effect for distributions made on or after 30 October 2024. HMRC has said that it will stand by clearances given earlier.  

In a briefing to MPs, ICAEW’s Tax Faculty has expressed concern that the definition of “acquisition costs” is too narrow in that it excludes other costs that the EOT may incur in acquiring the shares and managing its interest in the company. These include professional fees incurred on acquiring the shares and fees paid to professional trustees. ICAEW recommends that the draft legislation is amended to include a much wider set of costs in order to prevent unintended tax liabilities arising in the trust.  

The new rules relating to distributions were part of a package of measures announced at the Autumn Budget 2024. In recent articles for TAXline, Nick Wright explains how EOTs work and looks in detail at the recent changes: 

• An introduction to employee ownership trusts
• The tax benefits of employee ownership trusts