Employee Benefit Trusts: looking to the future
On 9th December the government announced new measures to counter disguised remuneration using employee trusts and similar vehicles such as unapproved pension funds. The measures seek to block schemes where the funds can earmark assets for the use of individuals, for example by the provision of loans to beneficiaries. By these means individuals could receive cash but defer indefinitely the payment of tax on the benefit.
Where cash or other assets have been earmarked for an individual, however informally, the whole value will now be treated as income in the hands of the recipient. There is no repayment of tax if the amount of loan or other benefit is repaid. The legislation will come into force on 6th April 2011 but there are anti-forestalling provisions which catch most loans or other benefits being offered between 9th December 2010 and the end of the tax year.
How will this affect loan-back arrangements?
Arrangements that pre-date 9th December 2010 are unaffected. Where for example the trustees of an employee benefit trust have lent money to a beneficiary prior to that date, there will be no automatic charge to tax. However, HMRC has stated that it will continue to try to counter such arrangements under existing legislation presumably on the grounds that the loans are a sham and therefore subject to attack on general anti-avoidance principles.
It appears that it will still be possible to enter into new loan or similar arrangements prior to 6th April 2011 without incurring tax on the value under the new rules as long as the loans are repaid by 5th April 2012.
What about other kinds of benefit?
There are specific exemptions for the award of share options (including unapproved options and the government sponsored Company Share Option Plan [CSOP], Enterprise Management Incentive [EMI] and Save-As-You-Earn [SAYE] scheme). There is also a specific exemption for the Share Incentive Plan (SIP) and certain other more specialised arrangements.
The situation regarding other share-based benefits is less clear. For example, it could be argued that the provision of incentives under a Long Term Incentive Plan (LTIP) could be caught. LTIPs typically offer cash or shares in tranches over time, contingent on the achievement of performance conditions. It could be argued that the offer of conditional benefit is tantamount to earmarking the underlying asset.
It would clearly be unfair if individuals had to pay tax now on amounts they can only receive later, or will never receive at all. It is expected that the legislation will be changed to deal with this problem, or that the matter will be dealt with by extra-statutory concession.
RM2 employee trusts
The RM2 Partnership, through its subsidiary RM2 Trustees Limited, acts as trustee of more than 100 UK employee benefit trusts. None of these have been used for loan-back or similar avoidance schemes, or for the purposes of PAYE or NIC avoidance by contractors in the IT or other industries.
All RM2 trusts are operated in conjunction with employee share schemes. Here they serve two valuable purposes:
(i) to allow existing shareholders to supply shares for employee schemes by selling their shares into trust; and
(ii) to create an internal market in the shares of unquoted companies so that employees who acquire shares through an incentive scheme are able to sell them back into trust and obtain value.
Used in this way, Employee Benefit Trusts (EBTs) can confer major planning advantages to companies offering bona fide employee share schemes and the beneficiaries of those schemes. There can also be benefits for existing shareholders. If you would like further information on these benefits, please call us on 020 8949 5522 and ask to speak to one of our advisers.