What are the new rules for an employee ownership trust (EOT)?
In response to concerns raised by the Institute of Chartered Accountants in England and Wales (ICAEW), the government has suggested changes to some of the ambiguity within the draft tax legislation concerning distributions made by a company to an EOT to cover the cost of acquiring the company.
What is the history behind EOT legislation?
Tax reliefs are available when an EOT acquires shares in a trading company, provided certain conditions are met. In some cases, part or all of the consideration for the shares may be deferred and paid out of the company’s future profits through a contribution to the EOT. The tax treatment of these distributions has been a point of concern for several years. Until the Autumn Budget 2024, it was common practice to seek clearance from HMRC to confirm that the contribution would not be taxable for the trustees of the EOT.
The Finance Bill 2024-25 introduced legislation stating that, for tax purposes, the amount of the distribution is reduced by the trustees’ “acquisition costs,” as defined in the legislation.
In a December 2024 briefing to MPs, ICAEW raised concerns that the current definition of acquisition costs is too narrow and could lead to unintended tax liabilities for the trust. ICAEW highlighted that the definition excludes other potential costs the EOT might incur in acquiring the shares and maintaining its interest in the company.
How has the legislation changed?
The government has now proposed an amendment to the Finance Bill 2024-25, expanding the definition of “acquisition costs” to include sums spent by the trustees on:
- acquiring the shares in the company;
- paying interest related to the acquisition, provided the rate is reasonable;
- settling any liability to stamp duty or stamp duty reserve tax on the acquisition;
- repaying any funds borrowed to finance the acquisition;
- valuing the company, if carried out in connection with the acquisition; and
- any other reasonable expenses that relate directly to the acquisition (this excludes any expenses incurred in connection with the ownership of the shares once acquired).
What is ICAEW’s view?
“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.”
What happens next?
Finance Bill 2024-25 is currently progressing through the House of Commons and is now at the Committee stage. MPs reviewed and approved some of the clauses in December 2024 and will continue to consider the remaining clauses and amendments, including those related to EOTs.
The Bill will become law once it receives Royal Assent. The provisions outlined above will apply to distributions made on or after 30 October 2024.
For further guidance on Employee Ownership Trusts, please do not hesitate to contact our team on 01903 234094.