Employee Benefit Trusts (EBTs)
The principal uses of an EBT include:
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acquiring sponsoring company shares and granting rights over them for the benefit of 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.
Succession planning with an employee benefit trust
The acquisition of shares from the proprietors of a private company can be a useful in succession planning, and can create considerable tax-efficiency for existing shareholders. 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.
Multiple tax reliefs
EBTs are routinely used to grant share options and other benefits to company employees. In many cases these awards can be structured so that employees receive substantial tax benefits. Usually, corporation tax relief will also be available on the value of the benefits when they pass to the employees, for example on the exercise of options. In a well-designed scheme, further tax benefits may be available to the existing shareholders.
Loans to shareholder / directors
In recent years, employee benefit trusts have often been used to provide loans to shareholder directors. There was no real intention to repay the loans, so that the recipients effectively paid tax only on the unpaid interest. On December 9th 2010 new regulations were introduced which ensure that sums of money made available in this way are subject to an immediate tax charge. Accordingly most loan-back and similar arrangements are now ineffective.
You may download our factsheets on company employee benefit trusts, view our online Directors’ Guide or contact one of our employee benefit consultants for a free consultation.
