Employee Benefit Trusts

An Employee Benefit Trust (EBT) is a type of discretionary trust that is used to hold assets that will be used to provide benefits for the employees of a company. They are very often used alongside an employee share scheme to acquire and hold a pool of shares that can then be used to incentivise employees in the form of shares, or options over shares. This might be in relation to a specific employee share scheme or for a number of different employee share schemes.

The establishment of an Employment Benefit Trust can also provide a vehicle through which employee held shares can be bought back if, for example, the employee leaves the company and is required to sell his shares under the company’s Articles of Association. We can provide you with a cost effective service in implementing an Employment Benefit Trust that will work alongside your employee share scheme.

An Employment Benefit Trust is usually set up to comply with certain statutory requirements. For example, it may be set up to fall within the definition of an Employee Benefit Trust as set out in the Companies Act 2006. This then provides exemption from many company law requirements in relation to share schemes.

Generally speaking, an Employee Benefit Trust that is UK resident will fall within the scope of UK income tax on all of its trust fund income and within the scope of UK capital gains tax on all trust fund gains. There are tax advantages to setting up an EBT that is resident outside of the UK. However, anti tax-avoidance legislation has created a complex set of rules in relation to the use of an EBT, which includes restrictive exceptions in relation to employee share schemes. A company should therefore exercise caution and engage a skilled tax adviser who can advise in this area.

There are many other practical points for consideration in the implementation of an Employee Benefit Trust:

• Who will act as trustees of the Employee Benefit Trust? Will these be individuals or a professional company? Whilst a trustee may be generally appointed by the settlor company it will need to exercise its own discretion in making decisions. Each trustee a fiduciary duty to act in the best interests of the beneficiaries of the trust (i.e. the employees) as a whole.

• Is shareholder approval required to implement the Employee Benefit Trust? This may be required under the company’s Articles of Associationor a Shareholders’ Agreement or under the Listing Rules for a public company.

• How will the Employee Benefit Trust be funded e.g. by loan or by gift? Loans to an EBT can have various accounting, company law and tax consequences for different types of companies.