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EOT trustees must be able to demonstrate compliance with these new requirements in line with HMRC’s guidance to ensure that a disposal of shares to an EOT on or after 30 October 2024 is CGT free, and that the trustees qualify for income tax relief on contributions from the company to fund payment of the consideration.

This applies equally in relation to share disposals to an EOT that took place on or after 30 October 2024 but before HMRC published their new guidance on 4 April 2025.

The new guidance confirms that HMRC will determine whether EOT trustees have ‘taken all reasonable steps� to secure that the price paid for shares they acquire does not exceed their tax market value by reference to ‘the steps that a reasonable prudent person would take�.

HMRC say that, typically, this could involve obtaining a professional third-party tax valuation. The guidance goes on to say that this could be obtained by the company whose shares are subject to the transaction, or by another person (presumably, for example, a vendor), provided that the trustee can rely on that valuation.

The company might obtain a third-party tax valuation of the shares to confirm whether it will have any PAYE and NIC withholding obligations when the shares are sold (e.g. if the shares are employment-related securities that are subject to income tax on disposal as being for consideration in excess of their tax market value), and the vendors might obtain a third-party valuation to support sale negotiations with the EOT trustees (though this might need adjustment to reflect the specific statutory and case law requirements to be suitable as a tax valuation). However, in both these cases, if there were the potential for an actual or perceived conflict of interest the EOT trustee might wish to consider obtaining an independent review of that tax valuation.

As HMRC’s guidance does not offer any examples of ‘steps that a reasonable prudent person would take� other than obtaining an independent professional tax valuation, this might be read as, in effect, mandating that trustees at least obtain a third-party tax valuation to ensure the ‘consideration requirement� for a CGT free disposal is met.

For transactions of a relevant value, EOT trustees might consider that some form of due diligence exercise would also be a reasonable step to take.

Where interest is payable on any deferred consideration, whether it exceeds a ‘reasonable commercial rate� should be assessed when the transaction takes place (i.e. HMRC do not appear to require this to be reassessed in light of any subsequent changes to commercial interest rates generally).

In summary, the new guidance confirms that HMRC interpret ‘reasonable commercial rate� to mean a rate:

• Commensurate with the expected rate that would be applied to deferred consideration in an equivalent transaction with another EOT; or
• Taking into account commercial rates of interest on loans with an equivalent level of security or guarantees for a similar period.

HMRC therefore appear to expect EOT trustees to benchmark any interest payable on deferred consideration against comparable transactions with other EOTs (which might be challenging where necessary data isn’t publicly available), or against comparable commercial loans with a similar risk profile.

In addition to ensuring that all other qualifying conditions are met, for disposals to an EOT on or after 30 October 2024, vendors who intend to claim CGT relief on that disposal, and trustees who intend to claim income tax relief on funding from the company to pay the consideration, must satisfy themselves that the trustees have ‘taken all reasonable steps� to ensure they do not overpay for the shares, and that any interest payable does not exceed a reasonable commercial rate.

As a practical matter, they must also be satisfied that, if required to do so on an enquiry, they could demonstrate this to HMRC. In line with HMRC’s new guidance this is likely to require commissioning an independent professional third-party share valuation for tax purposes and, where interest is paid on deferred consideration, evidence that the interest rate was suitably benchmarked.

Vendors and trustees who concluded a share sale to an EOT on or after 30 October 2024, when the new requirements were introduced, but before HMRC’s guidance was published on 4 April 2025, should also satisfy themselves they could demonstrate compliance with the new requirements in line with HMRC’s expectations. In these cases, it might be necessary to undertake independent valuation and benchmarking exercises retrospectively to support the vendors� and trustees� tax filing positions.

ÀÖÓ㣨Leyu£©ÌåÓý¹ÙÍø in the UK’s multidisciplinary team of tax, legal, trust law and valuation professionals can advise vendor shareholders and trustees on all aspects of transitioning a company to employee ownership through an EOT. Please contact the authors or your usual ÀÖÓ㣨Leyu£©ÌåÓý¹ÙÍø in the UK contact to talk through what these changes might mean for you.

For further information please contact:

• Paula Hargaden
• Jonathan Riley