An Employee Benefit Trust (EBT) can be a great tool for businesses to reward employees, promote employee share ownership and tax efficiently. Whether you’re a private company planning for succession or wanting to enhance employee benefits, an EBT is a powerful option if done correctly.
This guide will walk you through how to set up an Employee Benefit Trust, covering key steps, tax implications and legal documentation to ensure compliance and effectiveness.
What is an Employee Benefit Trust (EBT)?
An Employee Benefit Trust (EBT) is a legal arrangement where a company transfers assets—usually shares or cash—into a trust for the benefit of its employees, including former employees and in some cases close relatives. The trust is managed by a trustee company (often a professional corporate trustee) that holds a fiduciary duty to act in the best interests of the beneficiaries.
EBTs are used for:
- Rewarding employees through bonuses and share schemes
- Enabling employee shareholders to hold shares securely
- Supporting employee ownership trusts for long term succession planning
- Purchasing shares at a later date in line with business growth
How Does an Employee Benefit Trust Work?
Understanding how an employee benefit trust works is key to getting the most out of it. Essentially the trust acts as an independent legal entity that holds and manages assets—usually company shares—on behalf of employees. The company transfers assets to the trust and the trustees manage those assets according to the rules in the trust deed. The trustees have the discretion to distribute benefits, such as shares or bonuses, to eligible employees based on performance, tenure or other criteria. This structure not only aligns employee interests with the business but also ensures the distribution of rewards is managed fairly and transparently.
Benefits of an Employee Benefit Trust
Setting up an EBT can give you:
- Tax Efficiency: EBTs can offer income tax, capital gains tax (CGT), and inheritance tax (IHT) efficiencies when structured correctly.
- Promoting Employee Share Ownership: EBTs simplify management of employee share schemes and helps companies crack the culture of ownership.
- Flexible Reward Mechanisms: Through discretionary trusts companies can reward performance metrics or long term service milestones.
How to Set Up an Employee Benefit Trust1. Define Your Goals
Before setting up an EBT you need to clearly define your objectives. Are you looking to encourage employee ownership, plan for succession, enhance employee benefits or manage tax more effectively? Defining these objectives will dictate how the trust is structured and managed.
Common objectives include:
- Retaining key talent with long term incentives
- Managing employee share ownership effectively
- Reducing exposure to corporation tax and CGT
2. Choose the Right Trust Structure
There are different ways to structure an EBT depending on your company’s needs:
- Discretionary Trusts: These give the trustees the freedom to decide how and when benefits are distributed. A discretionary trust for employee benefits is the most common form.
- Fixed Trusts: Benefits are distributed according to predetermined rules.
- Employee Ownership Trusts (EOTs): These hold a controlling interest in the company on behalf of employees, supporting long term employee ownership.
Consider using a special trustee company if the trust fund involves significant assets or complex employee share plans.
3. Draft the Trust Deed
The trust deed is the core legal document that sets out:
- The purpose of the EBT
- The rules for managing the trust assets
- The process for distributing benefits to employees
Make sure the trust deed aligns with your company’s articles of association, shareholders’ agreements and any existing employee share schemes. Legal advice is crucial here to ensure compliance with relevant laws and tax regulations.
4. Appoint Trustees
Trustees manage the trust in the best interests of the beneficiaries. They can be:
- Professional corporate trustees with experience of managing EBTs
- Company directors (though care needs to be taken to avoid conflicts of interest)
- Employee representatives to ensure balanced governance
Trustees have a fiduciary duty to act impartially and must consider the tax implications of their decisions particularly around employment income, CGT and potential IHT charges.
5. Fund the Trust
The company contributes assets to the trust which may include:
- Cash reserves
- Company shares
- Other valuable assetsWhen transferring shares, consider the market value, as this may trigger corporation tax or affect the company’s accounting period. The way the trust is funded can also impact tax efficiency.
6. Tax Considerations
Tax is a key consideration when setting up an EBT. Key areas include:
- Income Tax: Benefits provided through the EBT may be treated as employment income, taxable.
- CGT: The trust may be liable for CGT when assets are sold. In some cases it’s possible to reduce or eliminate UK CGT altogether.
- Corporation Tax: Contributions to the EBT may be deductible, reducing the company’s corporation tax liability if done correctly. However companies should be mindful of corporation tax charges on certain transactions.
- IHT: If the EBT is classified as a relevant property trust it may attract periodical IHT charges.
Because of the complexity of these issues, tax advice is highly recommended to ensure compliance with current tax rules.
7. Communicate with Employees
Communication is key to an EBT’s success. Employees need to know:
- How the EBT works and how they can benefit
- The criteria for receiving share awards, bonuses or other benefits
- The role of the trustees in managing the trust
Good communication builds trust and reinforces the EBT as part of the company’s commitment to its workforce.
8. Ongoing Management and Compliance
An EBT isn’t a “set and forget” structure. It requires ongoing management, including:
- Regular trustee meetings to review trust activity
- Monitoring the performance of the trust fund
- Ensuring compliance with changing tax rules
- Reviewing the trust’s alignment with business objectives
Trustees should regularly review the trust, adjust strategies as needed and ensure distributions continue to reflect the company’s objectives.
EBTs and Employee Share Plans
An EBT can add huge value to a company’s employee share plans by providing a flexible mechanism for holding and distributing shares. Whether the company has Share Incentive Plans (SIPs), Enterprise Management Incentives (EMIs) or other share based reward schemes the EBT can act as a central repository for shares, simplifying administration and compliance with regulatory requirements. By integrating the EBT with these plans companies can streamline the process of issuing shares, manage vesting schedules and create a cohesive structure that supports long term employee engagement and retention.
Tax Points to Consider
When managing an EBT businesses must be aware of tax risks. Contributions to the trust, share transfers and employee benefits can all have tax consequences including potential charges for income tax, CGT, IHT and corporation tax. Mismanage and you could get caught out with unexpected liabilities which is why tax advice is key.
Conclusion
Setting up an Employee Trust can be beneficial for businesses and employees alike. It supports succession planning, rewards employees and can deliver tax efficiencies if done correctly.
But an EBT requires careful planning, thorough legal documentation and expert oversight to ensure compliance with complex tax rules. Working with legal advisors, tax professionals and professional corporate trustees can help you create an EBT that aligns with your company’s long term goals and benefits your employees.
For companies looking to encourage ownership, manage employee share schemes and optimise tax outcomes an EBT is an investment in your business’s future and your workforce.
