Employee Benefit Trusts
What is an Employee Benefit Trust (EBT)?
An EBT is a discretionary trust usually set up by a company under which property (often shares in the company although there is usually an initial amount of cash) is held on behalf and for the benefit of a class of beneficiaries, which is usually employees and former employees.
Why consider an EBT?
In addition to the general benefits of employee ownership as detailed in our blog on EOTs, the EBT:
- Is useful if a company wishes to make share awards to employees without the employees having to pay anything for their shares
- Allows a long term holding of a number/percentage of shares on behalf of employees
- Can create an internal market for the company’s shares
- Can buy shares back from participating employees who wish to sell because they are leaving the company
- Is a more flexible scheme than an EOT
Who is the trustee?
Trustees can be individuals or a company. As there are many obligations and responsibilities of trustees, it is common to have a corporate trustee, which can either be a company established specifically to be a corporate trustee, an existing subsidiary of the company, or an independent company administered by a third party.
Who are the beneficiaries?
Usually, this will be the employees and former employees of the relevant company (and sometimes dependents of such employees). The beneficiaries will be defined in the trust deed.
Who is the Settlor?
The settlor is the individual(s) or the company that transfers property to the trustees of the EBT for the benefit of the EBT beneficiaries.
Establishing an EBT
For an unquoted company, the directors of the company have the power to establish an EBT. The trust deed will be the main document establishing the trust and empowering the trustees to operate the trust for the benefit of the beneficiaries. There may be an operating agreement or a loan agreement, depending upon the circumstances. There will usually be a letter of recommendation or letter of wishes giving recommendations for awards. HMRC will need to be notified of the establishment of the EBT.
There are inheritance tax benefits, provided the EBT meets the statutory criteria, including exemption from the ten-yearly charge on the value of assets in the trust fund and exemption from the exit charge on the value of assets leaving the trust fund. CGT and income tax rules will apply although there may be ways to mitigate this. Appropriate tax advice should be sought.
If you would like more information or if you have any questions or queries relating to the above, please contact Stephen Attree, Rachel Owen or a member of our corporate commercial team on 0161 926 9969 or email: firstname.lastname@example.org.