Family Benefit Trusts (FBTs)

A Family Benefit Trust (FBT) is a discretionary trust arrangement which provides a flexible reward structure to deliver a wide range of benefits to employees, former employees and their families in a tax efficient manner. An FBT can be integrated into the existing remuneration package to help increase competitiveness, and attract, motivate and retain key employees.

An FBT arrangement can be designed according to the employer's commercial objectives and it can incorporate any desired vesting or performance conditions. It can be used either on its own or in conjunction with other long term incentive plans. The specific design and risk issues associated with these arrangements will need to be addressed on a case by case basis.

Suitability

An FBT is particularly suitable for employers seeking to:

  • Implement tax efficient alternative methods of delivering discretionary bonuses for domiciled and non-domiciled individuals in the UK
  • Increase the tax efficiency of new and existing long term incentive plan awards (LTIP)
  • Implement a bonus deferral plan to act as an employee retention mechanism
  • Impose a holding period on shares acquired under an LTIP or share option plan
  • Enhance the net benefit of golden hellos and/or handshakes

Benefits

  • Employer contributions are not taxable as remuneration in the hands of the employee
  • Employer contributions are not subject to UK National Insurance (NI)
  • The gross amount contributed may be invested and, as the Trust is resident offshore, any capital gains (whether on UK situs assets or not) any non-UK source income in the Trust would be tax free
  • Interest free loans (giving the employee instant access to cash) and a variety of other benefits-in-kind can be provided to the employee at any time during or post employment
  • During employment, interest free loans are taxed at an effective rate of 2.5% per annum (at current rates) of the outstanding loan amount
  • The benefits-in-kind provided can be tailored to suit each individual and are subject to usually low tax charges during employment
  • Following cessation of employment with the Employer, loans and other benefits-in-kind may be provided free of income tax and NI
  • Assets held in an FBT are not part of the individual's estate for inheritance tax purposes and any loans outstanding on the date of death may reduce the taxable value of the estate
  • Post death contributions may be made to family members free of tax
  • Employer contributions into the FBT can be structured to ensure the Employer remains cost-neutral as compared to paying the employee a cash bonus
  • Once implemented, the structure requires minimal internal administration input from the Employer

Structure of an FBT

  • An offshore, discretionary employee benefit trust (EBT), administered by a professional Trustee company, is set up by the Employer for the benefit of all employees, former employees and their families
  • The Employer makes voluntary contributions into the EBT
  • The Employer may then recommend that the Trustee appoints the contribution into sub-funds for the benefit of named employees and their families. Each employee will have their own sub-fund.
  • The EBT, together with the sub-funds, is commonly referred to as an FBT
  • The Trustee has complete discretion over whether to accept the recommendations of the Employer/employee beneficiary regarding use of assets in the sub-fund but may only exercise their discretion for the benefit of the beneficiaries
  • The Trustee may provide a wide variety of benefits to the employees from the FBT at their discretion
  • It should be noted however that outright cash or asset distributions would be fully subject to UK income tax and NI throughout the employee's lifetime, whenever made
  • Therefore, in order for the maximum advantage to be obtained, the employee should view the FBT as a lifetime planning structure under which the capital is not distributed as a cash payment

Corporate Tax Deduction

  • Generally any UK corporate tax deduction that may be available for contributions to the FBT is deferred until taxable distributions are taken from the FBT
  • To ensure the Employer remains cost-neutral, compared to paying a cash bonus, it is possible to adjust the contribution into the FBT to take account of this potential indefinite deferral of the deduction.

Risks

  • The FBT arrangements can reasonably be described as low risk for the Employer
  • Many corporates have implemented similar structures and HMRC are aware of the planning
  • Generic opinion from a leading tax Counsel has confirmed that FBTs are effective under current legislation
  • However there is a risk of future change of law or HMRC practice
  • In certain circumstances, anti-avoidance legislation may be invoked by HMRC on untaxed income within the sub-fund. There are various strategies available to mitigate such anti-avoidance tax charges. In the event that HMRC successfully applies the anti-avoidance legislation, there would be no impact for the Employer.
  • There is potential for exposure to Employer social security payments on future distributions from the FBT. However with appropriate structuring the costs can be transferred to the employee, if so desired.
  • Special considerations are required for close companies.
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