Employee Benefit Trusts (EBTs): What are they and when are they used?
Employee Benefit Trusts (EBTs): What are they and when are they used?
What is an Employee Benefit Trust?
An Employee Benefit Trust (EBT) is a discretionary trust that is settled by an employer for the benefit of its employees.
EBTs can be UK or non-UK tax resident dependent on where the trustees are tax resident. Offshore EBTs tend to have a professional corporate trustee in place, whereas UK EBTs often have the directors of the employer company as trustees.
When are EBTs used?
EBTs can play a role in share incentive arrangements put in place for employees, and as part of transactions where some of the newly issued shares are warehoused for future senior hires or key performers.
An EBT works well in these contexts, either as a warehouse for un-allocated shares and/or creating an internal marketplace for buying shares from employees when they leave. The key is ensuring appropriate tax advice is taken in advance.
How are Employee Benefit Trusts taxed?
The tax treatment of an EBT can be complex. For example, from an income tax perspective, EBTs are a third party and so must be considered under the anti-avoidance disguised remuneration rules. In particular, trustees of the EBT need to be conscious of these rules, which treat certain “relevant steps” as giving rise to an earnings charge subject to PAYE and NIC.
From an inheritance tax (IHT) perspective, EBTs that meet the conditions are exempt from the normal discretionary trust 10-year charges and exit charges. However, caution is needed as EBTs can be subject to a flat rate exit charge when a transfer is made.
Where both income tax and IHT charge occur in the same year, double tax relief should be available but there can be issues where the charges fall into separate years.
Employee Benefit Trusts and HMRC
EBTs have received bad press over the last 10 or more years because of their prominence in historical tax planning arrangements, which have largely been characterised as avoidance schemes by HMRC. The most notable example is the Rangers Football Club EBT scheme which ended up at the Supreme Court and where HMRC successfully argued that contributions into the EBT were diverted earnings subject to PAYE. Read more about the remuneration trust settlement opportunity.
Expert advice on EBTs
If you have any questions about creating an EBT for your business or any historical matters, please get in touch – our team of specialists will be happy to help you.