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Employee Benefit Trusts Explained

There has been a great deal of discussion recently in the UK contracting sector about Employee Benefit Trusts and how they fit into current taxation laws. But many people do not know what an Employee Benefit Trust actually does and why it might be created. An Employee Benefit Trust, or ‘EBT’ is a trust written on discretionary terms by which trustees can hold assets on behalf of and to benefit a set group of beneficiaries, usually a number of employees and ex-employees from the company funding the trust, and often including their families. In addition to holding monetary assets and funds for the potential future advantage of beneficiaries to the trust, trustees of Employee Benefit Trusts sometimes hold securities and shares in the employing group for potential distribution or the granting of options and often acting as a potential purchaser from holders of company shares.

EBT’s are normally quite complex and function both as a way of providing benefits to higher salaried employees and their families and dependants as well as offering incentives to current and future employees which are target or profit linked. They also serve as a way of attracting high quality job applicants and new staff.

EBT’s can be used in two ways, either as a complex and creative way for higher earners to get preferential tax planning, or as a means of giving incentives to entrepreneurship and facilitating joint interests of employers, employees and shareholders. The government and HMRC obviously frown on the former and encourage the latter. Thus there are a number of onshore schemes geared towards the award of securities and shares to employees and inevitably, a number of offshore EBT schemes to avoid tax charges on income and gains arising to trustees. Employee Benefit Trusts essentially work through a funding company making a contribution to the offshore trust by gift or loan. The funding company would make it clear that the funds are to be used by the trust for the benefit of employees. In return the trustees will often notionally allocate the funds to the benefit of certain employees.

When it comes to EBT’s in the UK there is still a great deal of uncertainty as to their status. This is why they remain such a powerful and creative tax tool when used by high earners and the super-rich. In recent times legislation and the court have cleared up some of the uncertainty that has clouded the issue of EBT’s. However, their use in aggressive tax planning is growing in popularity in many fields, beyond those of the super-rich. There are now EBT’s being set up for contractors, for example. The contractors become ‘skilled employees’ under the trust. The company managing the trust might pay the contractor a basic salary, normally at minimum wage and the rest of their wages would be paid into the offshore EBT. The trustees would then make an interest free loan to the contractor. This would mean that contractors, like the rich and other people who use offshore EBT’s could achieve  a far higher gross to net ratio on their income.

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