You may have heard about Employee Benefit Trusts (EBTs) and how they can be advantageous for both your company and your employees. But what exactly is an Employee Benefit Trust, and how does it work? In this comprehensive guide, we will break down the key aspects of an EBT, its benefits, and how you can set up and manage one for your business.
What is an Employee Benefit Trust (EBT)?
An Employee Benefit Trust (EBT) is a legal arrangement set up by a company to hold shares on behalf of its employees. The purpose of an EBT is to provide benefits to employees, usually in the form of share ownership. EBTs are often used as a tool to incentivise and reward employees, aligning their interests with the long-term success of the company.
How does an Employee Benefit Trust work?
An EBT typically acquires shares from employees or the company itself. These shares are held in a trust fund, and the trustees of the EBT are responsible for managing the trust on behalf of the beneficiaries, who are the employees. The beneficiaries don’t own the shares directly; instead, they’ve a right to the benefits provided by the trust, such as receiving dividends or selling the shares at a later date.
One of the key benefits of an EBT is that it allows employees to become shareholders in the company they work for, giving them a sense of ownership and a stake in the company's success. This can lead to increased motivation, loyalty, and commitment among employees.
What rights do employees have in an Employee Benefit Trust?
As beneficiaries of the trust, employees have certain rights and entitlements. These rights may include:
- Dividends – employees are entitled to receive dividends on the shares held by the trust (the trustees will distribute the dividends among the beneficiaries based on the trust deed's provisions)
- Share sale – employees may have the right to sell their shares to the trust or a third party as specified in the trust deed (the proceeds from the share sale will be distributed to the beneficiaries)
- Voting rights – although employees do not directly own the shares, they may have voting rights on certain matters concerning the shares held in the trust (this could include voting on company resolutions or electing directors)
- Share options – some EBTs offer employees the option to acquire additional shares in the future, subject to certain conditions and restrictions.
For these reasons, you need to create a well-drafted trust deed that clearly outlines the employees' rights and the trustees' responsibilities to ensure a smooth and transparent operation of the EBT.
Who’s responsible for accounts for an Employee Benefit Trust?
The trustees of the EBT are responsible for managing and administering the trust, including its accounts. The accounts must keep accurate and up-to-date records of the trust's financial transactions, investments, and distributions. Trustees have a fiduciary duty to act in the best interests of the beneficiaries and ensure compliance with all legal and regulatory requirements.
To ensure proper financial management, it’s advisable to engage a professional accountant or financial advisor who’s experienced in dealing with trusts and employee benefit schemes.
Do Employee Benefit Trusts Pay tax?
EBTs are subject to various tax considerations. Here are some key points to consider:
Income tax
When the trust receives dividends or other income, it may be liable to pay income tax on that income. However, if the trust is set up as an Employee Ownership Trust (EOT), it can benefit from certain tax advantages, such as a capital gains tax exemption on the sale of shares to the trust.
Capital gains tax
When the trust sells shares, it may be liable to pay capital gains tax on any gains made from the sale. Again, if the trust qualifies as an EOT, it may be eligible for certain tax reliefs.
Corporation tax
If the company contributes funds to the trust to purchase shares, this contribution may be treated as an expense for corporation tax purposes.
Disguised remuneration schemes
You need to ensure that the EBT is not used as a disguised remuneration scheme to avoid income tax and National Insurance contributions. HM Revenue and Customs (HMRC) actively monitors and scrutinises such arrangements.
How to set up an Employee Benefit Trust
Setting up an EBT involves several steps:
- Consultation – before proceeding, it’s essential to discuss the EBT with your employees and obtain their buy-in. Clear communication about the purpose, benefits, and potential risks of the EBT is crucial.
- Trust deed – engage a solicitor experienced in trust law to draft the trust deed, which will govern the EBT's operation. The trust deed should outline the objectives, rights of beneficiaries, powers and duties of trustees and any restrictions or conditions.
- Choosing trustees – select trustees who’re capable, trustworthy, and willing to act in the best interests of the beneficiaries.
- Funding the trust – transfer funds or shares to the trust to establish it. Decide whether the trust will purchase shares from employees or directly from the company.
- HMRC notification – notify HMRC about the creation of the EBT and any relevant tax implications.
- Employee communication – communicate the establishment of the EBT to all employees, explaining their rights and benefits as beneficiaries.
- Ongoing management – Regularly review and manage the EBT to ensure its objectives are met and comply with legal requirements.
Employee Benefit Trust disguised remuneration
As mentioned above, you should be aware that using an EBT as a disguised remuneration scheme to avoid income tax and National Insurance contributions is unlawful and can result in severe penalties. HMRC is vigilant in identifying and challenging such arrangements.
To avoid any issues, ensure that your EBT is set up for legitimate purposes, such as promoting employee share ownership and incentivising long-term commitment to the company's success.
Get legal assistance from LawBite
An EBT is a powerful tool to help you incentivise and reward employees through share ownership. It can create a sense of ownership, aligning employees' interests with the company's long-term success. However, setting up and managing an EBT requires careful planning, compliance with tax regulations and transparent communication with employees.
When setting up an EBT, you should also consider whether it makes sense for your company's specific circumstances. If you’ve a close company with a limited number of shareholders, an EBT could be a viable option to promote employee share ownership.
However, if your business is not suited to an EBT, there’re other share schemes and employee ownership models available that may better suit your needs, such as an Employee Ownership Trust or a Sharesave Scheme. If you're considering establishing an EBT, seeking professional advice from solicitors and accountants experienced in trust law and tax planning is recommended.
Our team of expert solicitors can support you with preparing the legal documentation required to get your EBT up and running and provide guidance on the best practice for managing it. To find out more about how we can support your business, book a free 15 minute consultation with one of our expert lawyers or call us 020 3808 8314.
