The Employee Benefit Trust
An employee benefit trust (EBT) is a discretionary trust established under a trust deed and introduced by a business, whether it be a company, a group of companies or a partnership, for the benefit of past, present and future employees and their relatives. The trust deed sets out the names of the trustees and the powers which they have been granted by the business. The trustees typically have the power to decide who is to benefit, how they are to benefit and when they are to benefit. By making regular payments into the fund, employers can give employees access to a range of different benefits in the form including cash distributions, loans as well as shares in the employer company.
Previously, by making contributions to an EBT, the company could reduce its taxable profits. Employers could claim corporation tax relief on contributions to the EBT before the employees received any benefit or paid tax and national insurance on it. However, the case of Macdonald v. Dextra and the introduction of legislation in 2003, 2004 and 2007 have narrowed the extent to which an EBT can be used as a tax-saving vehicle by the company. Corporation tax relief on the contributions made by the company cannot be claimed until a taxable benefit is conferred on an employee. Effectively the tax relief for the company is deferred until a payment is made out of the EBT in a form that gives rise to a liability to income tax and NIC for the employees.
There are a variety of ways in which employers can use EBTs for the benefit of their employees:
- to purchase shares which will be used to satisfy long-term incentive plan awards;
- to support the delivery of their employee share schemes by permitting employees to sell their shares to the trust for other employees to buy or the company itself can fund the sale via a loan, in which case the company purchases the shares from the employees;
- to provide interest-free loans which is a tax-efficient way of providing a benefit to an employee.
Despite the Dextra case and HMRC's attempts to restrict its use, the EBT remains an attractive vehicle in which to attract, retain and motivate staff.
We welcome the opportunity to meet with you and your clients to discuss these matters in more detail.
Brian Monk B.Acc., C.A.
Group Finance and Compliance Director
OCRA (Isle of Man) Limited
Email : monk@ocra.com
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