Can an EBT make loans to employees?

Employee loans through an Employee Benefit Trust can create significant tax and compliance risks. Depending on the circumstances, loans may trigger employment income tax, National Insurance contributions, or other tax consequences. Modern EBT arrangements generally avoid loan-based reward structures and should be reviewed by a qualified UK tax adviser.

Will the company get a corporation tax deduction for EBT funding?

Potentially. The availability and timing of corporation tax relief for Employee Benefit Trust contributions depend on the circumstances and applicable tax rules. Relief may arise when employees are taxed on the relevant benefits rather than when the trust is initially funded. The company should review its position and claim any available relief in its corporation tax returns with appropriate professional advice.

Are offshore EBTs still acceptable?

An offshore Employee Benefit Trust is not automatically exempt from UK tax obligations. UK employment-related securities rules and disguised remuneration legislation may still apply, depending on the arrangement and circumstances. The choice of jurisdiction should consider governance, regulatory compliance, administration, and the relevant UK tax implications rather than tax avoidance.

What IHT pitfalls should we watch for?

Inheritance Tax (IHT) considerations include whether the trust qualifies for any relevant employee trust exemptions and whether its terms and actual operation satisfy the applicable conditions. Trusts that benefit only a narrow group of shareholders or connected individuals may face different tax treatment. Depending on the trust structure, relevant property charges, including periodic and exit charges, may arise. Obtain specialist advice on the trust deed, beneficiaries, and applicable exemptions.

Setting Up Employee Benefit Trust | EBT Formation

Q: Is an EBT the same as an EOT?

No. An Employee Benefit Trust (EBT) is a remuneration trust used to provide employee incentives and benefits. An Employee Ownership Trust (EOT) is a specific trust structure used for employee ownership succession, with different objectives and tax rules. In an EOT, shares are typically transferred to the trust at market value to support fair valuation and compliance with applicable tax requirements.

Setting Up Employee Benefit Trust (EBT)

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

HeirPlan's 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, every step is structured to meet current disguised-remuneration and inheritance-tax requirements while achieving commercial goals.

Employee Benefit Trust

What is an EBT? A discretionary trust set up by a company for the benefit of its employees, former employees, and their dependants, forming a scheme established for employee benefit purposes.

Why use one? To hold, manage, and deliver employee incentives, including shares or option settlements, and to provide a flexible warehouse for unallocated shares.

Key cautions: UK disguised remuneration (Part 7A ITEPA 2003) rules can trigger PAYE and NIC. Inheritance tax rules have special reliefs for qualifying EBTs but can still create charges if conditions are not met.

Best for: Companies running bespoke or legacy share plans, or needing a mechanism to recycle shares, such as buy-backs on leavers, where standard HMRC-approved plans do not fit.

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 trust 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, subject to robust conflicts and governance policies.
Typical assets: Employer shares, whether issued or purchased, option proceeds, cash for awards and 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:

Share warehousing: Holding newly issued or repurchased shares for future grants, such as future senior hires or performance awards.

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

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.

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

Settlement and appointments: The company settles the trust with a nominal sum and appoints trustees.

Funding: The trust is funded with company contributions or other funds, with money paid into the trust either as cash or shares.
Asset management: Trustees acquire or hold securities, such as shares or loan notes, at market value, and later deliver benefits, such as transferring shares or paying 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.
Corporation tax deductions: The 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.
Payroll and taxes: Payroll reports and taxes are operated when benefits are provided or when a “relevant step” occurs under disguised remuneration. The timing of payments, repayments, and interest can affect tax reporting.

Tax overview

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.

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 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.

Consult our advisers to Setup Employee Benefit Trust

Speak directly with our HeirPlan EBT specialists to evaluate your feasibility, structure your trust, and ensure full compliance.

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.

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.

Setting Up Employee Benefit Trusts