If your business is owned by an Employee Ownership Trust (EOT), or you are considering a transition to employee ownership, there is an important change you need to know about.
The change from 30 October 2024
Before 30 October 2024, HMRC generally accepted that certain contributions made by a company to an EOT to fund the cost of buying that company’s shares were not taxable distributions.
HMRC’s position has changed; HMRC are now of the view that such payments are distributions for tax purposes, which could be subject to income tax at rates of up to 39.35%.
A specific relief from the charge to income tax in the EOT now exists but this relief is not automatic and must be claimed by the trustees.
The relief covers distributions used to fund the EOT’s qualifying acquisition costs, including:
- The acquisition cost of the ordinary share capital in the company by the trustees;
- The repayment of amounts borrowed to fund that acquisition;
- The payment of interest on any deferred consideration (providing interest is charged at a reasonable commercial rate);
- The cost of any valuation of the company carried out in connection with the acquisition;
- Stamp duty or stamp duty reserve tax liabilities on the acquisition; and
- Such other reasonable expenses as are directly connected with the acquisition (but this does not include any expenses incurred in connection with the ownership of the ordinary share capital once acquired).
Distributions received by the trust that do not fall within the relief requirements will be taxable receipts for the EOT and a trust tax return will be required where such distributions are received.
How to claim
A claim must be made within four years from the end of the tax year in which the distribution was made. If no claim is made within this period, the distributions will be taxable.
Where the EOT files self-assessment tax returns, the claim is made in the return. Otherwise, a claim should be made to HMRC in writing.
Existing HMRC clearances
HMRC have confirmed that they will continue to honour any clearances already agreed in relation to the treatment of such payments to EOTs, so some EOT trustees may not need to claim relief if non-statutory clearance was obtained from HMRC.
We can help
Please get in touch if you require assistance with preparing self-assessment tax returns for an EOT, or with claiming the relief.
