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Setting Up Employee Benefit Trusts

Setting Up Employee Benefit Trust (EBT)

Setting up an Employee Benefit Trust (EBT) demands careful structuring, tax planning, and ongoing governance.

Our HeirPlan experts specialise exclusively in EBT design and implementation—from feasibility analysis and trust deed drafting to trustee appointments, PAYE/NIC compliance and HMRC reporting. Whether you need a UK-resident trust or an offshore professional trustee, we ensure every step meets the latest disguised-remuneration and inheritance-tax requirements while achieving your commercial goals.

Employee Benefit Trust

  1. What is an EBT? A discretionary trust set up by a company for the benefit of its employees (and sometimes former employees and their dependants), forming a scheme established for employee benefit purposes.
  2. Why use one? To hold, manage, and deliver employee incentives (often shares or option settlement) and to provide a flexible “warehouse” for unallocated shares.
  3. Key cautions: UK disguised remuneration (Part 7A ITEPA 2003) rules can trigger PAYE/NIC; IHT rules have special reliefs for qualifying EBTs but can still create charges if conditions aren’t met.
  4. Best for: Companies running bespoke or legacy share plans, or needing a mechanism to recycle shares (e.g., buy-backs on leavers) where standard HMRC-approved plans don’t fit.

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    Employee Benefit Trust

    What is an Employee Benefit Trust?

    An Employee Benefit Trust (EBT) is a discretionary trust settled by an employer to benefit its employees, former employees, and their dependants, who are the beneficiaries. The trustees hold assets (typically company shares or cash) on behalf of these beneficiaries and exercise discretion over how and when benefits are provided. EBTs are a form of discretionary trusts commonly used in employee incentive planning. The extent of the class of beneficiaries is a key legal requirement for establishing an EBT.

    An employee share trust is a related structure, set up by employers as a type of discretionary trust to provide employee incentives and manage share-based remuneration plans.

    • Residence: EBTs can be UK-resident or non-UK resident, depending on where the trustees are resident. Offshore EBTs often use a professional corporate trustee; UK EBTs commonly appoint company directors as trustees (with robust conflicts and governance policies).
    • Typical assets: Employer shares (issued or purchased), options proceeds, cash for awards/bonuses, and occasionally other assets linked to incentive plans. Company contributions are a common way to fund the trust.
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    When are EBTs used?

    EBTs are most commonly used to support equity-based remuneration and share plan operations. EBTs can also be used to facilitate employee share ownership and employee share schemes, providing a legitimate structure for companies to implement these arrangements:

    1.Share warehousing: Holding newly issued or repurchased shares for future grants (e.g., future senior hires or performance awards).

    2.Internal market making: Providing a mechanism to buy shares from leavers or to satisfy exercises/vestings without constant market transactions.

    3.Plan administration: Sitting behind long-term incentive plans (LTIPs), growth shares, or bespoke arrangements where a trust improves flexibility and control, and supporting employees participating in these plans as part of an employee share scheme or employee share ownership structure.

    4.Legacy/complex cases: Managing historic awards or tidying up previous schemes during corporate events (M&A, restructurings, buy-backs). EBTs can also play a role in succession planning, helping to ensure business continuity by facilitating the transfer of ownership to employees.

    Good practice: Involve tax, legal, payroll, and company secretarial teams before funding the EBT or taking any “relevant steps”.

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    How an EBT works

    1. Company settles the trust with a nominal sum and appoints trustees.
    2. Trust is funded with company contributions or other funds; money is paid into the trust, either as cash or shares.
    3. Trustees acquire/hold securities, such as shares or loan notes, at market value and later deliver benefits (e.g., transfer shares or pay cash) in line with plan rules and trustee discretion. Payments made to employees or repayments of loans must be properly documented and may involve interest.
    4. Company claims deductions (if available) under corporation tax rules where conditions are met, including when payments are made or loans are repaid (subject to complex timing tests).
    5. Payroll reports and taxes are operated when benefits are provided (or when a “relevant step” occurs under disguised remuneration), and the timing of payments, repayments, and interest can affect tax reporting.

    Tax overview

    1) Income tax, PAYE & NIC: Disguised remuneration (DR)

    • EBTs are third parties to whom the employer may transfer value. UK DR rules (Part 7A ITEPA 2003) are intended to prevent tax avoidance through such schemes by treating certain “relevant steps” by an EBT as creating taxable employment income, generally subject to PAYE and NIC. These rules specifically target schemes involving disguised remuneration, where financial rewards are provided as loans or other indirect forms rather than direct payments.
    • Common triggers: EBT loans to employees, earmarking assets for specific employees, or transfers of shares/cash that confer a reward connected with employment. Payments made through indirect or direct means can trigger tax charges.
    • What to do: Identify potential steps in advance, operate PAYE/NIC on chargeable amounts, ensure timely RTI reporting, and identify all parties involved and their connection to the scheme.

    2) Inheritance Tax (IHT)

    • Qualifying EBTs can be exempt from standard relevant property charges (e.g., 10-year and exit charges) if the trust meets specific employee trust conditions as set out in recent legislation (e.g., benefits not limited to a small, pre-selected group and not primarily for shareholders). Note that connected persons—such as employees or shareholders with a significant financial interest—may be excluded from certain IHT benefits. EBTs can also provide pension-related benefits to employees, depending on the trust structure.
    • Caution: If conditions are not met, this can affect the trust’s IHT status, and EBTs can face relevant property charges or a flat-rate exit charge on transfers out.
    • Double tax relief: Where both income tax and IHT arise on the same value in the same tax year, double tax relief may be available—but not where the charges fall in different years.

    Key takeaway: The design and ongoing operation of the EBT determine the tax outcome. Minute-taking, trustee independence, and clear policies matter

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    Frequently Asked Questions

    Is an EBT the same as an EOT?

    No. An EBT is a remuneration trust for incentives/benefits. An EOT is a special trust used for employee ownership succession, with different tax rules and aims. In an EOT, shares are typically transferred to the trust at market value to ensure fair valuation and compliance with tax requirements.

    Loans are a high-risk DR trigger. In most cases they will create taxable earnings. Modern EBTs avoid loan-based reward structures.

    Potentially, but timing often aligns with when employees are taxed on the benefit, not necessarily when the trust is funded. The company must claim any available relief in its tax returns. Get modelling advice.

    Residence alone doesn’t solve UK tax exposures. DR rules can still apply to UK employments. Choose jurisdiction for governance quality, not avoidance.

    Ensure the trust meets employee-trust conditions and isn’t drafted to benefit only a narrow shareholder group; otherwise periodic/exit charges may arise.