Employee benefit trust (EBT)

There has been plenty of publicity about HMRC scrutiny of employee benefit trusts and headline grabbing attention paid to the tax bills some tax payers have been presented with.

Can companies and their employees still benefit from employee benefit trusts (EBTs) in the modern world? The headline conclusion is EBTs still offer benefits in the right situation.

We are specialists in all forms of employee incentives including advising on which is best for you, why, how to structure, tax impliactions and of course the corporate law and legal documents aspects. Please do give us a call or email us to start the discussion about what's best for you. We are niche, which means we are efficient, offer persoanl service and are competitive on legal fees.

We look at:

• Overview of when an EBT can solve a problem
• Common uses of an EBT
• Contrast with EOTs
• Structure and set up for Employee Benefit Trusts

Overview of Employee Benefit Trusts

Employee benefit trusts (EBTs) still have their uses. HMRC has tightened up on many of the tax benefits but there are commercial reasons why you may need an EBT.

In private companies where there is no market for the shares such as an exit or trade sale and there are no shareholders who can or want to acquire the shares an EBT can act as a purchaser for the shares – this is known as warehousing. In real life many companies find they do not need to establish an EBT as there is a way of selling the shares usually upon an exit or a company buy back of shares.

The basics of an EBT

The simple idea is that the purpose of an EBT is to incentivise and reward employees by encouraging loyalty and commitment and a desire to see the company perform well. Employee interests become more aligned with those of the shareholders.

An employee benefit trust is a type of discretionary trust established by an employer for the benefit of the company’s employees, former employees and  some of their relatives and dependants – the beneficiaries.

The EBT holds employee assets, most often shares, share options and awards but also  cash payments and phantom awards for the beneficiaries.

EBTs play an important role for companies, whether seeking to achieve employee incentivisation or security for employees in a tax beneficial manner or otherwise.

EBTs can be set up by a holding company and the beneficiaries can be all of the group’s employees.

Common uses of an EBT

An EBT should be considered for:

• Warehousing or hiding - to create a vehicle to acquire and hold a pool of shares to satisfy share awards under a company's employee share plans.
• Multinational companies  - to cost effectively incentivise a large number of eligible employees in many different jurisdictions, as an alternative to granting share options and/ or issuing shares which can involve a consideration of legal and/or tax rules in each of those different jurisdictions.
• Creating an internal market - to enable employee shareholders in a private company to sell their shares and receive value.
• Buying shares from shareholders - who are required to sell their shares under the company’s articles of association or shareholders agreement, for example, an employee shareholder who leaves the company.
• Enabling the deferral of employee bonuses - whether in cash or shares.

The use of EBTs will be dependent on whether an EBT fits the approach and objectives that the business owners want to establish or preserve.

Contrast with EOTs

An EBT is not subject to the same rules as an employee share ownership trust (EOT). An EOT is a different structure serving a different purpose. The easiest way to explain this is:

• An EBT acts as market or warehouse for shares held by employees and or directors in private companies. The trustees of the EBT are only responsible for the assets placed under their trust via the EBT.  The trustees are not responsible for the management of the employer company. There is usually no change of control when shares change hands as the shareholdings placed in the EBT are normally small and less than 51% of the issued share capital.
• An EOT acquires the entire business and acts as new owners of the shares.  The EOT takes over management of the business which becomes employee controlled. The vendors are usually the founders of the company and retire upon sale of their shares to the EOT or at the least take a back seat role.

Set Up and structure of Employee Benefit Trusts

There is wide discretion available to companies on how they set up and run their employee benefit trusts. In practice EBT's are bespoke and designed to suit the needs of the business. Key considerations often include :

• Choice of trustees - the EBT can be administered by a professional trustee company who prepares trust accounts and completes tax returns. Individuals can act as trustees but this is rarer. The trustee company can be a specially formed company set up in the UK or offshore. Offshore trustees are very common because they are exempt from capital gains tax. Jersey and Guernsey are the most popular jurisdictions – we do have contacts and can introduce you to trustees.
• Funding the EBT - the EBT will need to be funded to enable it to acquire shares or other property. Funding can be arranged in different ways. Corporation tax relief is available on payments made to the EBT. There are rules on the timing for claiming corporation tax relief which are broadly aligned to the timing for when the beneficiaries will be taxed.
• Loans to the EBT - usually the loan from the company is made interest free. The loan can include terms for when it must be repaid – for example when the EBT sells its shares as part of the exit. The loan could be made by a third party such as a bank.If the company establishing the EBT is a “close company” (and many private companies are close) there are tax implications to consider when looking at loans.
• Gifts to the EBT - the company can gift money to the EBT which the EBT then uses to acquire shares. If the acquisition of shares is by way of subscription the gift is in effect paid back to the company by way of the subscription price. Gifts can be made by third parties such as a current shareholder.

Legal documents for an EBT

The documentation needed to establish the EBT will be a trust deed. The trustees have to preserve their independence and discretionary powers. But what happens in practice when the company wants the trustee EBT to consider exercising its discretion in a particular way (for example by transferring shares to a particular employee) is the company sends the EBT trustees a “letter of wishes”. The letter of wishes asks the trustees to take the steps recommended. Usually the trustees comply.

There are reporting requirements to HMRC and we guide employers through the process.

Solicitors advice on Employee Benefit Trusts

In the right situation an employee benefit trust (EBT) is the way forward and will achieve the employer’s aims. There is plenty of choice and flexibility available for employers. We work with employers to establish and operate the EBT on terms that suit them. Please call on 0207 438 1060 to discuss.

See also our case studies on Employee Benefit Trusts.