Employee Benefit Trusts (EBTs)
The principal uses of employee benefit trusts include:
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acquiring and holding shares and other assets for the purposes of providing benefits to employees, former employees and their families;
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in private companies, creating an internal market so that employees can buy and sell shares they have acquired.
Employee benefit trusts can also play a valuable role in succession planning for private companies. Download the Employee Benefits Trusts fact sheet.
Succession planning
The acquisition of shares from the proprietors of a private company can be a useful in succession planning. If the trustees are to hold shares for any length of time, they are normally based offshore so that no capital gains tax arises.
In closely held private companies, an employee benefit scheme should be used for the benefit of employees and not for the purposes of providing benefits for existing major shareholders. Failure to observe this may lead to serious inheritance tax issues.
Loans to shareholder / directors
Employee trusts are sometimes used to provide loans on commercial terms to shareholder/directors. The loan may continue until the death of the recipient, when it is effectively removed from the recipient's estate but may still be available for family members. If the trust is correctly structured, the loans can be made without triggering the inheritance tax problems mentioned above. However HMRC may seek to counter this advantage.
Offshore employee trusts
Offshore EBTs can be useful for rolling up investment gains in a tax free environment, for example for employees who are not UK domiciled or later move overseas. However if gains crystallised offshore are subsequently remitted to the UK, a special additional tax charge is imposed.
Corporation tax relief is available when benefits pass to employees from an employee benefit trust, but only when the benefits are subject to both income tax and NICs.
You may download our factsheets on company employee benefits, view our online Directors’ Guide or contact one of our employee benefit consultants for a free consultation.
