New tax relief rules for EOTs: What trustees and employee-owned companies need to know

The Finance Act 2025 introduced a significant change to the taxation of distributions made by trading companies to EOTs, with the insertion of section 401ZA into the Income Tax (Trading and Other Income) Act 2005. This new provision, effective for distributions made on or after 30 October 2024, provides a specific income tax relief for trustees receiving such distributions to fund the acquisition of shares in the company.

Historically, HMRC accepted that specific payments to EOT trustees were not distributions under CTA 2010 s1000, and this was often confirmed via non-statutory clearance. However, HMRC has now clarified that such payments are distributions and subject to income tax unless relief is claimed.

Under the new regime, trustees may deduct qualifying acquisition costs from the distribution, provided the deduction does not reduce the distribution below nil and the costs have not already been relieved elsewhere. These costs include:

• Share acquisition expenses
• Interest on deferred consideration
• Stamp duty
• Other directly connected costs

Crucially, the legislation is clear: relief must be claimed. Trustees have up to four years from the end of the relevant tax year to do so. If a self-assessment return is filed, the claim should be included there.

However, HMRC guidance confirms that trustees who are not registered for self-assessment do not necessarily need to register solely to claim this relief. Instead, they may submit a written claim to HMRC, including details such as the EOT’s TRS reference, the company’s registration number and a breakdown of acquisition costs (CTM15580).

Where the trustees of an EOT established before 30 October 2024 receive gifts / distributions from the relevant company, HMRC’s position appears to be that:

• Trustees do not need to make a claim for relief under s401ZA in respect of amounts which qualify for relief
• Trustees do not need to submit an SA900 self-assessment tax return if they have no potentially chargeable gains and their only potentially taxable income consists of amounts qualifying for relief under s401ZA

Trustees of pre-30 October 2024 EOTs, who decide not to make a section 401ZA claim in writing or via submitting an SA900 return for a tax year on the above basis, should keep detailed file notes recording these decisions and the underlying analysis. 

As EOTs continue to gain traction, recent legislative updates highlight the vital importance of ongoing post-sale governance, particularly trustee compliance, in maintaining access to tax reliefs.  Trustees must stay aligned with the evolving tax framework to protect the long-term integrity and benefits of the EOT structure. Notably, where the EOT-owned company indemnifies the trustees, any resulting tax liabilities may ultimately fall on the business itself.

Do get in touch with your usual contact or any of the contacts listed if you would like to discuss this in more detail.

Approval code: NTEH7092543