Background 

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 by way of 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.   

Legislation included in the Finance Bill 2024-25 provides that the amount of the distribution is reduced for tax purposes by the trustees’ “acquisition costs”, as defined in the legislation.  

In a briefing to MPs published in December 2024, ICAEW expressed concern that the definition of acquisition costs was too narrow and may give rise to unintended tax liabilities in the trust. ICAEW warned that the current definition excluded other costs that the EOT may incur in acquiring the shares and managing its interest in the company.  

Changes to the legislation 

The government has put forward an amendment to Finance Bill 2024-25, which extends the definition of “acquisition costs” to mean sums spent by the trustees on: 

1. acquiring the shares in the company;
2. paying interest in connection with the acquisition provided it is at a reasonable rate; 
3. settling any liability to stamp duty or stamp duty reserve tax on the acquisition;
4. repaying any sums borrowed to fund the acquisition; 
5. valuing the company, if carried out in connection with the acquisition; and
6. any other reasonable expenses that are directly connected with the acquisition, excluding any expenses incurred in connection with the ownership of the shares once acquired. 

The costs noted in points 4-6 in the list above are new, having been added by way of amendment.  

ICAEW’s view 

Richard Jones, Senior Technical Manager – Business Tax, said: “Although we are pleased that the government has taken action, this feels like a missed opportunity. Widening the definition of acquisition costs to include other costs that the trust may incur in buying the shares is a positive step. It is unfortunate that the trustees will have to claim the relief each year, as this will bring almost all EOT trustees into self assessment, at least while the acquisition costs are being paid off, if not longer. This increases the administrative burden, both for trustees and for HMRC.” 

“The ongoing costs of the trustees, such as fees to professional trustees and other costs they may incur, are now explicitly excluded from the distribution relief. This raises several questions, such as: Will they be treated as taxable dividends, with only the post-tax amounts available to trustees to pay their costs? Alternatively, will HMRC accept that such payments are not made to the trustees in their capacity as shareholders, in which case the payments may not be considered to be distributions at all? Will a non-statutory clearance application be required for each payment to confirm that HMRC accepts that it is not being made to the trustees as shareholders, but in some other capacity?” 

Next steps 

Finance Bill 2024-25 is currently making its way through the House of Commons and is now at the Committee stage. MPs considered and approved some of the clauses from the bill on 10 and 11 December 2024. MPs will begin to consider the remaining clauses and amendments, including those relating to EOTs, on 28 January 2025.  

The Bill will become law when it receives Royal Assent. The provisions described above apply with effect for distributions made on or after 30 October 2024.   

Further information 

• The text of the Finance Bill 2024-25 and the amendments tabled to date can be found on parliament.uk.
• News article: ICAEW comments on Finance Bill 2024-25
• News article: Succession planning: could an ESOT be the answer?