What are the new rules on taxing distributions to EOTs?

HMRC changes mean that Employee Ownership Trusts (EOTs) are facing a new approach to how distributions to EOTs, formerly known as contributions, are treated for tax purposes. If you are an EOT-owned business, it is important to understand these changes and manage your compliance obligations.

What has HMRC changed about Employee Ownership Trust distributions?

Until October 2024, HMRC generally accepted that contributions made to an EOT by its trading subsidiary were not taxable in the EOTs hands. 

HMRC has since changed course and stated that its previous treatment was incorrect. HMRC’s position now is that such payments are distributions and will be subject to income tax on the EOT at 39.35%, unless trustees claim a new form of tax relief.

HMRC will not seek to disturb the treatment of distributions made to EOTs prior to 30 October 2024 and will also honour clearances granted prior to this date in certain circumstances. If you are an EOT owned business, it is important to seek advice to understand how you will be affected by these new rules. 

The good news

EOTs can claim relief from income tax in respect of distributions received to cover ‘acquisition costs’. Broadly, acquisition costs include:

• Purchase consideration to acquire the shares in its trading subsidiary
• Commercial-rate interest on deferred consideration
• Valuation fees tied to the original acquisition
• Repayment of borrowing used to fund the acquisition 

The trustees have 4 years from the end of the tax year in which the distributions are made to make a tax relief claim. 

Watch out for non‑qualifying payments

If your EOT receives distributions to fund anything other than acquisition costs (for example, independent trustees' fees), an income tax liability could arise, and the EOT may be required to file a trust tax return. 

Take action now

If you’re an EOT owned business and are likely to be affected by the above changes, it is important to seek advice to understand your position and ensure you meet your compliance obligations. The Bishop Fleming EOT team would be happy to help. You can contact us by clicking here.