How to claim tax relief on contributions made by companies to fund EOT vendor loans

Prior to the October 2024 budget, there was a legislative grey area surrounding the tax treatment of contributions made by companies to fund EOT vendor loan repayments and payments of vendor interest accruing on them. HMRC acknowledged this grey area and confirmed through various means (non-statutory clearances and concessions) that contributions by a trading company to fund such payments will not be taxable on the trust (EOT). This grey area was again addressed in the October 2024 budget by the introduction of section 401ZA ITTOIA 2005 (Relief: distributions to trustees of employee-ownership trusts).

What the new legislation says

The new legislation states that where contributions are made by a company on behalf of the trust, they are now classed as taxable distributions to the trust and that the trust may claim full tax relief on those distributions, to the extent the contributions are to fund the trustees’ acquisition costs.

Trustees’ acquisition costs for which relief can be claimed are defined as follows:

• the acquisition of ordinary share capital in C (the company) by the trustees that resulted from the disposal
• the repayment of any sums borrowed to fund that acquisition
• the payment of interest on any such sums or in respect of any deferral of consideration for the disposal to the extent the payment is not in respect of interest exceeding a reasonable commercial rate
• any valuation of C carried out in connection with the acquisition
• any liability to stamp duty or stamp duty reserve tax on the acquisition
• 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).

How to claim relief

A claim for relief must be made for any contributions made from 30 October 2024 onwards, irrespective of whether the deal completed before or after the October 2024 budget. Whilst this is not a retrospective change, it does affect all contributions made by all EOTs, even those that were established well before the October 2024 budget.

Therefore, companies under EOT ownership, will need to ensure that a relief claim is made on the trust tax return (if one is prepared), or that a relief claim letter is sent in covering all EOT contributions made from 30 October 2024 and onwards.

The time limit to make a claim is within four years from the end of the relevant tax year, but by not making an annual claim the trust risks having to pay tax before the claim is made.

Relief claims should therefore be made on an annual basis following the tax year end, covering distributions made in the tax year (6 April to the following 5 April). The first claim will only need to cover distributions made from 30 October 2024 to 5 April 2025.

The claim requirements are detailed in the link here: CTM15580 - Distributions to EOTs - HMRC internal manual - GOV.UK.

Other implications of this legislation

Where a vendor has retained a shareholding in an EOT owned trading company, or holds share incentives (EMI shares, restricted shares), a tax issue now arises if the EOT purchases these shares using company funds.

This is because the funding supplied by the company to purchase the shares is treated as a taxable distribution to the EOT and the new relief does not enable the trust to claim tax relief on a distribution for these purposes.

The result is that any EOT that wishes to purchase shares following the end of the tax year of the original sale, cannot do so without incurring a tax charge at trust level.

This applies to all contributions made by all EOTs, regardless of whether they were completed before the October 2024 budget announcement.

To avoid the tax charge, the company should instead purchase any directly owned shares through a share buy-back.