Employee benefit trusts

Produced by Tolley in association with Karen Cooper of CooperCavendish LLP
Employee benefit trusts

The following Owner-Managed Businesses guidance note Produced by Tolley in association with Karen Cooper of CooperCavendish LLP provides comprehensive and up to date tax information covering:

  • Employee benefit trusts
  • Why do companies establish EBTs?
  • Who can act as trustees of an EBT?
  • How is an EBT funded?
  • Corporation tax deductions for EBTs
  • IHT
  • Capital gains tax for UK resident EBTs
  • Section 218 notices
  • Post-disguised remuneration

Employee benefit trusts (EBTs) are commonly used to support employees’ share schemes and to provide other benefits to employees in the form of pensions and bonuses.

Their use has been significantly affected by the introduction of the disguised remuneration rules. Although the statutory exclusions will cover many of the share-scheme related activities of EBTs, some of their historic uses, such as providing loans to employees or being used as a long-term investment vehicle, have been substantially curtailed.

This note provides general guidance as to the purpose and taxation of EBTs. For further details of the implications of the disguised remuneration rules, please see the Disguised remuneration guidance note.

However, the use of EBTs as a vehicle for employee ownership has had a welcome boost following the Nuttall Report. It encouraged the use of employee trusts as vehicles for the long-term ownership of companies and pressed for a simplification of the tax and regulatory framework. As a result, new tax advantages were introduced in the Finance Act 2014 for employee owners who dispose of their interests to employee ownership trusts (EOTs).

Why do companies establish EBTs?

An EBT will usually be established by a company which will provide it with assets (cash or shares). The operation of the EBT is governed by the trust deed which lays down the obligations of the sponsoring company and the powers and duties of the trustees. The trustees must act in accordance with the terms of the trust deed and rules and in the best interests of the beneficiaries.

EBTs were originally developed to enable companies to provide a warehouse for shares. Historically, under UK company law, companies could not hold their own shares and were required to cancel shares if they redeemed or purchased them, although since 2003, companies with shares listed on the London Stock Exchange or traded on AIM can purchase their shares and hold them in treasury.

In April 2013, new provisions governing the buy-back of shares into treasury by private companies

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