Employee benefit trusts overview and administration

By Tolley in association with Karen Cooper of CooperCavendish LLP
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The following Employment Tax guidance note by Tolley in association with Karen Cooper of CooperCavendish LLP provides comprehensive and up to date tax information covering:

  • Employee benefit trusts overview and administration
  • Background
  • Establishing the trust
  • Trustees’ powers and duties
  • Managing the assets of the EBT
  • Letters of wishes
  • Administration agreement
  • HMRC reporting
  • Administration and disguised remuneration

Background

Employee trusts are commonly used to support employee share schemes but can also be used as part of an arrangement companies put in place to pay cash bonuses or other benefits. There are many different names for them, including employee share ownership plans (ESOPs), employee share trusts (ESOTs) and employee benefit trusts (EBTs), but they all fundamentally serve the same purpose as discretionary trusts set up by a company or group of companies as part of its remuneration strategy for employees.

An EBT will be established by a company (the sponsoring company) which will provide it with assets (usually cash or shares). An EBT will often be funded by way of loan or the company may make it an outright gift. The document governing how the EBT operates is called the trust deed and rules. This lays down the obligations of the sponsoring company and contains the powers and duties of the trustees. The trustees must act in accordance with the terms of the trust deed and rules and also act in the best interests of the beneficiaries.

Despite the negative publicity surrounding the role EBTs have played in anti-avoidance strategies to provide employees with tax free remuneration, Graham Nuttall, in his review of employee ownership highlights the benefits of EBTs as vehicles for the long term ownership of companies. Followingthe report and consultation exercise, certain tax breaks have been introduced for companies who are owned and controlled by trust vehicles (see the Employee trusts – implications of disguised remuneration and where are we now? guidance note).

Establishing the trust

The first thing to consider in establishing a trust, is who will act as the initial trustee. The identity of the trustees very much depends on where the trust is to be established and whether the company will want to operate the trust internally or