Employee Ownership Trust (EOT)
Following representations, the government has proposed amendments to the draft tax legislation concerning distributions made by a company to an Employee Ownership Trust (EOT) to finance the acquisition of the company.
Background
Tax reliefs are available when an EOT acquires shares in a company, provided certain conditions are met. Some or all of the consideration for the shares may be deferred and subsequently paid from the company’s future profits as a distribution to the EOT. The tax treatment of these distributions has been a long-standing concern. Until the Autumn Budget 2024, it was common practice to seek clearance from HMRC to confirm that the distribution was not taxable on the trustees of the EOT.
Legislation included in the Finance Bill 2024-25 stipulates that the taxable amount of the distribution is reduced by the trustees’ “acquisition costs,” as defined in the legislation.
In a briefing to MPs in December 2024, concerns were expressed that the definition of acquisition costs was too narrow and could lead to unintended tax liabilities for the trust. The organization highlighted that the definition excluded other costs incurred by the EOT in acquiring shares and managing its stake in the company.
Legislative Changes
The government has introduced an amendment to the Finance Bill 2024-25, broadening the definition of “acquisition costs” to include expenses incurred by the trustees for:
- Acquiring the company’s shares;
- Paying interest on acquisition-related borrowing, provided the rate is reasonable;
- Settling stamp duty or stamp duty reserve tax liabilities related to the acquisition;
- Repaying borrowed funds used for the acquisition;
- Conducting a company valuation if it is undertaken in connection with the acquisition; and
- Other reasonable expenses directly related to the acquisition, excluding costs associated with ownership of the shares post-acquisition.
The final three points listed above have been newly introduced through this amendment.
Next Steps
The Finance Bill 2024-25 is currently progressing through the House of Commons and is at the Committee stage. MPs reviewed and approved several clauses on 10 and 11 December 2024, with deliberations on the remaining clauses, including those concerning EOTs, scheduled to begin on 28 January 2025.
The Bill will become law upon receiving Royal Assent. The revised provisions will apply to distributions made on or after 30 October 2024.
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