In the context of an Employee Trust, [also known as an Employee Benefit Trust (EBT), or Employee Share Ownership Plan (ESOP)], a Trust is a discretionary entity that has the ability to borrow for the purpose of investing in the company's shares.
To gain a wider understanding, it might help to think about the three main characters involved in an EBT:
The Settlor: This is the person who decides they want to make some shares (or perhaps some cash) available for others. The Settlor is usually the Company, but may occasionally be an individual shareholder.
The Trustee: This is the person who is 'entrusted' to look after the shares or cash for the benefit of others. It is usually a special trustee company, but it is also possible to have one or more individuals acting as the Trustee. This company, individual or group is the legal owner of the Trust shares, and is legally obliged to act in the best interests of the Beneficiary.
The Beneficiaries: The people, usually the employees, former employees and close relatives, who are supposed to benefit eventually from the shares or cash. While the Trustee has legal ownership of the Trust shares, the Beneficiaries have an equitable interest in it.
Typically an Employee Share Ownership Plan will be funded either by loans or contributions from the company, or by a bank loan that is guaranteed by the company.
The Settlor will set out what is to happen in a document (called a Trust Deed or a Settlement). For example, it will usually say that the Trustee will look after the cash, shares or other assets during a set period (typically up to 125 years).
The Trust Deed will usually state that the Trustee has discretionary power to decide which of the Beneficiaries will receive an award from the Trust, and the method by which this is to be transferred to them. For example, they might be given the right to free shares or shares at a discount under an option, or the income from the shares might be paid to them as a form of dividends. The Trustee is not permitted to apply the benefits of any shares or cash held in the Trust to anyone other than the Beneficiaries.
A Beneficiary must either be an employee or officer of the company, or the spouse or dependant of an employee/officer. Note that it is not permitted to name the sponsoring company as a Beneficiary to the Trust.
There is deliberate flexibility.
The Trust will be governed by the relevant law, e.g. English law if the trust is set up in England. There are very high levels of responsibility imposed on a Trustee to act fairly, to act in the best interests of the Beneficiaries and to not make any profit personally out of the Trust (except as permitted by the Trust Deed).
The Beneficiaries will have certain rights both under the Trust Deed and by law.
The Trustee has to complete an annual tax return in the UK and pay tax if relevant.
The Settlor, as the Company, usually has some rights to make recommendations and sometime to veto acts of the Trustee.
Some common reasons for establishing an Employee Trust are listed here:
Succession planning: A retiring shareholder can sell shares into a Trust, which can then be used to transfer awards to the successor employees (the Beneficiaries). This is typically quite a tax efficient means of transferring shares.
Share liquidity: An EBT provides an internal market for employees to buy and sell shares.Employee share plans: To offer shares to employees under an Enterprise Management Incentive (EMI) or other option arrangement.
Warehousing of employee shares: The Employee Trust can be used as a reserve for employee shares, allowing them to be released over time for the purposes of employee incentives.
Preventing shareholder dilution: Shareholder dilution can be avoided by using an ESOP to acquire and recycle existing shares, instead of issuing new shares.
An Employee Trust can hold shares in the company that sets it up, whereas a subsidiary usually cannot. That means the Trustees can own shares and use them:
Because of the history of tax avoidance associated with trusts, there are complex rules which can give rise to unexpected tax charges. For example, if a trust is able to provide direct benefit to existing shareholders (other than purchasing their shares at fair value, then if the company is 'close', there may be a charge to inheritance tax on transfers made to the trust.
Problems and undesirable PAYE charges can also arise if trustees acquire and 'earmark' shares before making awards to employees. Furthermore, if warehoused shares have risen in value, the trustees may have a taxable gain. Offshore trusts in reputable jurisdictions, such as the Channel Islands, can some be appropriate. It is absolutely essential that specialist advice is sought.
We will take careful consideration of your individual requirements and objectives before providing a quote. In our experience, it is necessary to scope out the complexity of work involved in each individual case in order to offer an accurate quote. The reason for this is that we typically operate on a fixed fee basis, which allows us to be up front with our clients about the total costs involved with the process from the start, instead of being a meter running arrangement.
We are proud to offer a tailored service, and do not believe in a one-size-fits-all approach.
Trustee services pricing will differ depending on whether an onshore or offshore trustee is required.
If you would like a free consultation to discuss how an EBT may operate within your business, please contact RM2 directly on 020 8949 5522, or via email@example.com.