Employee Benefit Trusts(EBTs)

An Employee Benefit Trust (EBT) is a tax-efficient, flexible way to reward and incentivise members of staff. Instead of paying bonuses directly to employees, the employer makes more creative use of the bonus pool by contributing to an EBT. Specialist administration provides the maximum flexibility.

The history

EBTs became popular in the 1990s following an initial successful use by a major London Bank to incentivise its incoming expatriate employees. At that stage, and used in that context, the tax legislation allowed a full write off for expenses wholly and exclusively for employment. The expatriate usually took benefit when non-UK resident via the EBT and there was a mismatch created between the tax deduction given to the company and income subject to taxation assessed on the individual.

Matters soon escalated when instead of a major multi-national being the incentivising company, non-quoted and smaller shareholder based companies became active users. This led to a classic shareholder/Director conflict. The use of the EBT was therefore heavily engineered to ensure a tax saving took place. This reached its apex around 2001 when a company tried to loan back several million pounds from an EBT in the hope of avoiding NIC and full exposure to 40% income tax, whilst obtaining a Corporation Tax deduction at the company level. The resulting Dextra case helped clarify what HMRC would and would not allow. Finally, Schedule 23 of the Finance Act 2003 then placed into legislation the HMRC practice, and formally acknowledged recognition of EBTs as a separate legal vehicle, distinguishing them from pension and personal trusts.

Current use of EBTs

By placing HMRC's interpretation into legislation, tax payers are now certain of outcomes in various situations.

With the income tax rate being raised to 50% in 2010, and continuing high levels of NIC, EBTs are commonly being used as an effective method to remove excess profits from a company. Although no tax deduction is given until full income tax is paid by the recipient, the ability to move funds out of a company into a separate non-UK based Trust which is outside assessment to UK IHT, is attractive. In addition, the use of funds in the UK can be drip fed by paying income tax on only the benefit in kind if less than the commercial rate of interest is used. In cases where large amounts are involved, the potential risk of an obligation to withhold tax at source by the debtor (usually in the UK) can be reduced to nil by utilising a back to back loan via an established bank. We can arrange such a facility. Discounted Deep Discount Bonds, or "zeros" may also be considered.

Benefits

The benefits to be provided can be tailored to suit each employee's personal circumstances but in order for the maximum advantage to be obtained, the employee should view the EBT as a lifetime planning structure under which the capital is not distributed as a cash payment.
During employment, interest-free loans can be made. (See tax and NIC table)
Post employment, interest-free loans should be outside the benefit in kind regime that applies during employment and therefore no employment income tax should be payable.
If a loan made from the trust to the employee remains outstanding at the date of the employee's death, it will be treated as a debt on the employee's estate for IHT purposes, thus reducing the value of that estate.
If the employee is given the use of trust assets in a form constituting a benefit in kind, an annual income tax charge on the calculated value of the specific benefit will arise. However once that employment has ended, the provision of a benefit in kind (in the year following termination and subsequent years) will not give rise to any employment income tax charge.
If the employee is given a loan or is allowed to use assets, there may only be a small NIC liability for the employer. (See tax and NIC table)
Many employers recognise an EBT as also being an effective employee retention tool. One example is that the provision of benefits could be contingent on continued employment for a specified period.
An EBT can, in certain circumstances, provide relevant benefits that are described in our EFURBS section.

Family Benefit Trusts (FBTs)

Other variations on the EBT theme are the Family Benefit Trusts (FBTs). Here, separate sub funds are often set up and earmarked for family members. They are most suitable when an individual wishes to give value to a third party, including members of their own family. See separate information on Family Benefit Trusts (FBTs).

COMPARISON OF TAX RATES ON EXCESS PROFITS PAID AS:

Pension	Tax charged
Individuals	Up to 40% income tax (Up to 50% from 2010)
Company	Full tax deduction given if recognised scheme

Via EBT
Individuals	Outright distribution taxed at 40% but loans taxed at much lower rates down to effective rate of around 3% per annum No tax on Funds and investments retained in EBT
Company	No tax deduction until recipient individual assessed

Salary
Individuals	Up to 40% plus NIC (Up to 50% from 2010)
Company	Full tax deduction given

Dividend
Individuals	Additional dividend tax payable
Company	Paid after Corporation Tax - therefore not tax deductible