Following the changes to the legislation regarding Employee Ownership Trusts (EOTs) in October 2024, HMRC has recently published further guidance regarding the filings EOTs will be required to make going forward.

Up until October 2024 it was not necessary for an EOT to file a tax return unless it incurred a tax liability, which would have been highly unusual.

That changed in October 2024 when the rules around gifts to EOTs changed and HMRC reviewed its approach to such gifts.

HMRC now considers that gifts / capital contributions from a company to an EOT are potentially taxable as income in the hands of the EOT – but a specific relief (the “section 401ZA” relief) was introduced on 30^th October 2024 that means there is no tax to pay on these gifts so long as the gifts are used to:

1. fund upfront and ongoing payments of the purchase price for shares sold to the EOT when it acquired the majority shareholding in the company; and
2. cover interest payments and other costs related to the EOT’s purchase of shares, including the costs related to any borrowing and payment of stamp duty.

Although the relief will apply to almost all EOTs still in the process of paying the purchase price, it must now be claimed – either via the EOT filing a tax return or making a stand-alone claim for the relief.

The claim for relief must be made within four years of the end of the relevant tax year. For example, if (1) and (2) above are being paid over a seven year period, a return would need to be filed for each year such payments were made.

Once the purchase price and any related obligations have been fully settled, and assuming the EOT attracts no further tax liabilities, such filings should no longer be necessary.

You can find further information on HMRC’s guidance here: CTM15580 – Gifts to Employee-Ownership Trusts

Employee owned companies that are still in the process of repaying the debt as part of a transition will almost certainly need support from their accountants or tax advisers to ensure the correct filings are made and the relief is properly claimed.