Share Incentives: A Brief Overview of Employee Benefit Trusts and Employee Ownership Trusts

What is an Employee Benefit Trust (EBT)?

An EBT is a discretionary trust usually set up by a company for the benefit of the employees. A trust refers to the legal relationship created by a person (the settlor) when assets have been placed under the control of a trustee for the benefit of a beneficiary or for a specified purpose. 

The trust property of the EBT is held by a trustee for the benefit of a class of beneficiaries, which is usually employees and former employees. Usually, the employer company will set up the EBT, unless there is a group of companies, in which case usually the ultimate parent company will constitute the EBT, but an EBT can be established by an individual or a company.

Why establish an EBT?

There are several reasons why companies establish EBTs, such as:

• to acquire and hold shares for the purpose of providing awards under an employee share scheme

• to store a number of shares for the purposes of benefitting employees

• to enable bonuses in cash or shares to be deferred

• to act as a co-owner of shares (with employees) under a joint share ownership plan

• to provide an internal market for company shares

• to protect against increases in share price when granting awards under an employee share scheme

• to provide a buyer for shares which a seller (usually a departing employee) is required to sell under share plan rules, the company’s articles of association, or a shareholders’ agreement

There are tax benefits for establishing an EBT, including certain inheritance tax reliefs and capital gains tax reliefs.

What is an Employee Ownership Trust (EOT)?

The EOT was introduced by the Finance Act 2014 as a particular type of EBT that meets certain statutory criteria. This works in conjunction with certain tax benefits that became available for both companies and individuals. The purpose was to encourage the creation of employee-owned companies as an alternative to a trade sale.

What tax reliefs are available?

  • an exemption from capital gains tax (CGT) on certain disposals of shares to an EOT
  • limited relief from income tax on bonuses—up to £3,600 per year per individual paid by an employer company owned by an EOT
  • relief from inheritance tax (IHT) on certain transfers into and from EOTs

Conditions to be an EOT

  • the trading requirement – must be a trading company or holding company of one
  • the all-employee benefit requirement – must apply to all employees equally
  • the controlling interest requirement – trustees must hold more than 50% of shares and voting rights of the company

For a more detailed look at both EBTs and EOTs, subsequent blogs will follow in this Share Incentives series.