HMRC has updated its view on the taxation of Employee Ownership Trust (EOT) distributions – and the changes could have a significant impact on EOT-owned businesses.
HMRC has revised its approach to how payments made by trading companies to their EOTs are treated for tax purposes. These payments, previously referred to as “contributions”, are now regarded as taxable distributions in most cases.
This shift means some EOTs may now face unexpected tax charges where none previously arose.
If your business is owned by an EOT, it is important to understand how these changes apply and what steps you may need to take to remain compliant.
What has changed?
Up until October 2024, HMRC generally accepted that payments made by a trading subsidiary to its EOT were not subject to income tax in the hands of the trust.
HMRC now accepts that this long-standing interpretation was incorrect. Its current position is that these payments are distributions and, unless specific relief is claimed, are subject to income tax at the trust rate of 39.35%.
HMRC has confirmed it will not challenge distributions made before 30 October 2024, and will honour clearances issued before that date in certain circumstances. However, payments made on or after that date fall within the new approach.
Relief for acquisition costs
The good news is that income tax relief is available where distributions are received to meet qualifying acquisition costs. Qualifying costs typically include:
- consideration paid to acquire shares in the trading company
- commercial-rate interest on deferred consideration
- valuation fees directly linked to the original acquisition
- repayment of borrowing used to finance the acquisition
Trustees have four years from the end of the relevant tax year to make a claim for relief, providing some flexibility where claims have not yet been considered.
Non-qualifying payments
Distributions used for purposes other than acquisition costs – such as funding ongoing trust expenses or independent trustee fees – are unlikely to qualify for relief. In these cases, an income tax liability may arise, and the EOT may need to file a trust tax return.
What should you do now?
If your business is EOT-owned and you expect to make (or have already made) distributions to the trust, it’s important to review your position, including:
- understanding whether relief is available
- ensuring claims are made within the required timeframe
- assessing any additional compliance or reporting obligations
Get in touch
If your EOT‑owned business is likely to be affected by these changes, it’s important to seek advice to understand your position and ensure you meet your compliance obligations. To discuss how this may impact you, get in touch with Claire Astley, Tax Director, by clicking the button below.
