Finance Act 2025: What HMRC’s New Guidance Means for EOT Transactions

Following on from the changes to EOTs brought in by the recent Finance Act 2025, HMRC has now updated its Manuals to reflect and clarify these developments. This Guidance was published following consultation with the Employee Ownership Association (EOA) and Chartered Institute of Taxation (CIOT).

We look in more detail below at the welcome clarifications and the several key concerns that remain unaddressed.

Contributions to EOTs

By way of background, where a company is sold to an EOT and the original shareholders (i.e. the sellers) are paid off over a number of years, since the EOT itself doesn’t have any money, this is typically funded by the company making ‘contributions’ to the EOT out of its distributable profits. The EOT then uses these funds to pay off the original sellers over time.

Usefully, the Finance Act 2025 has made it clear that these contributions would not be taxable as ‘distributions’ (like a dividend) if they were used to pay off the sellers on the original sale of a controlling interest (more than 50%) to the EOT or other limited purposes related to that sale:

• paying interest on amounts due to the sellers, provided it does not exceed a ‘reasonable commercial rate’
• paying Stamp Duty on the original transfer of shares to the EOT
• paying for a valuation report; and
• paying reasonable expenses ‘directly connected with the acquisition’.

However, this leaves several other purposes for which a company might legitimately fund an EOT that are not covered by this list and as such are now potentially taxable as distributions.

For example, if there was a partial sale to an EOT (i.e. less than 100% of the shares in the company), and the remaining shareholders subsequently wished to sell more of their shares to the EOT, the EOT trustees would pay income tax on the funds received to fund payment for those shares: the funds .

ie what they receive will be taxable as distributions (at up to 39.35%), making the overall cost of that second acquisition much more expensive for the company.

In addition, the Stamp Duty, cost of the valuation report and transaction expenses will also potentially attract distribution tax.

Funding the ongoing costs of running an EOT (eg the cost of a professional trustee and accounting costs) would also now appear to be taxable as a distribution (see further below).

Therefore, it is extremely important for sellers to carefully consider the tax implications for both them and the company if they decide to sell less than 100% of their shares to the EOT.

EOT Trustees

The composition of the EOT trustees, will quite often include an independent professional (as well as a seller and employee representative). An independent professional trustee will generally wish to charge for their trustee services.

Again, since the EOT has no money itself, it will generally be the company that picks up the tab. If the trustee’s invoice is addressed to the EOT trustee company and the trading company contributes funds to the EOT to then pay these fees, under the new provisions it looks likely this will attract distribution tax, as these fees are not ‘directly connected with the acquisition’.

However, what the Guidance has not addressed is whether it will be free of distribution tax if (as is quite common) the invoice is addressed directly to and paid for by the trading company.

Valuation

EOT trustees (like any other trustees) must not pay over market value for shares or other assets they are acquiring. The Finance Act 2025 goes further requiring that they must ‘take all reasonable steps’ to ensure that:

• the consideration for the disposal does not exceed the market value of the shares; and
• where interest is payable on deferred consideration it does not exceed a ‘reasonable commercial rate’.

The Guidance confirms that to meet the valuation requirement, EOT trustees must take the steps a ‘reasonable prudent person’ would take to verify the consideration does not exceed market value. Typically, this would involve obtaining and considering an independent professional valuation report. This report may be obtained by the company or another person ‘provided the trustees are entitled to rely on it’.

Helpfully, the Guidance states that the EOT trustees may rely on this opinion unless they have reasonable cause to suspect material facts are incorrect or incomplete and that it does not need to be updated to the exact date of sale unless there have been material changes in the meantime.

What remains unclear is whether, particularly in higher value transactions, EOT Trustees should obtain their own valuation report (at the expense of the company), rather than relying on one obtained by the company or the sellers. We understand there is a view that (despite this not being reflected in the latest Guidance), HMRC may well expect this for higher value transactions.

Trustee Independence and Residence

The Finance Act 2025 brought in stricter requirements on the EOT trustee composition. There are now requirements that the Trustees are UK resident, that they comprise less than 50% ‘excluded participators’ (broadly, sellers) and that excluded participators do not in any other way control the EOT, i.e. the independence requirement.

Unfortunately, the Guidance clarifies that there is no leeway if the EOT trustees no longer meet either of these requirements, even for only a short period of time. For example, there may be an unexpected departure of one of the trustees due to ill health or an employee trustee leaving the company.

Only in the very limited case, when the death of a trustee occurs will there be a 6-month grace period.

If these requirements are not met, there will be a ‘disqualifying event’ and where that is within four tax years of the end of the tax year in which the original sale to the EOT occurred, the sellers will lose their capital gains tax relief on the original sale.

One way to address this risk may be to provide in the EOT trust deed that some trustees must immediately resign if this will ensure that the UK residence or independence requirement will continue to be met

Conclusion

While HMRC’s updated Guidance provides some helpful clarifications on how the recent legislative changes to EOTs will be applied in practice, it also highlights areas of continued uncertainty and potential tax pitfalls. In particular, companies and sellers must be especially careful when planning partial sales, structuring independent trustees’ fees, and navigating the new trustee independence and residency requirements.

As the practical implications of the Finance Act 2025 begin to take shape, it is more important than ever for those involved in EOT transactions to seek specialist advice to avoid unexpected tax consequences and ensure compliance with the evolving rules.

For further advice or if you have any questions related to this, please contact us on the details below…