Employee trusts ― implications of disguised remuneration and where are we now?

By Tolley in association with Karen Cooper of CooperCavendish LLP

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 trusts ― implications of disguised remuneration and where are we now?
Why do companies establish EBTs?
Who can act as trustees of an EBT?
How is an EBT funded?
Corporation tax deductions for EBTs
IHT
CGT for UK resident EBTs
Section 218 notices
Trust registration service
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. For further information, please see the Disguised remuneration ― overview guidance note. Although, the statutory exclusions from those rules cover many of the share scheme-related activities of EBTs, some of their historic uses, such as providing loans to employees or opportunities for wealth creation through long-term investment schemes, have been substantially curtailed.

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 structures 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 Finance Act 2014 for employee owners who dispose of their interests in companies to employee ownership trusts (EOTs).

Please note that all references to IHTA 1984 in this guidance note are subscription sensitive.

Why do companies establish EBTs?

An EBT is usually established by a company which provides it with assets in the form of cash or shares for the benefit of its employees. 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 their 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. Since 2003, companies with shares listed on the London