What is an employee benefit trust?

An employee benefit trust, also referred to as an EBT or employee share trust, is a trust that is created by an organisation for the benefit of its employees. It may also benefit former employees and their beneficiaries.

Simply put, the idea is to incentivise employees by boosting their loyalty to the business. The purpose is to increase the desire of employees to help the business perform well. As a result, the interests of employees are more aligned with the interests of the business and its shareholders.

EBTs are present in both the public and private sectors. They can be implemented alongside other incentive plans.

How does an employee benefit trust work in the UK?

For employee benefit trusts in the UK, there are some specific points to be aware of. Indeed, EBTs are subject to special conditions.

Your EBT is managed in compliance with these rules and regulations. In the UK, EBTs are typically subject to the Trustee Act 2000. This act defines the duties and responsibilities of trustees.

There can also be tax implications to be aware of for businesses looking to launch an EBT. For more information on EBT, tax and regulations, please visit the UK government website.

Individual employees are liable for Capital Gains Tax (CGT) when selling shares

Individual employees are generally still liable for CGT when they sell their shares. For more information about when employees are liable for CGT, please visit the UK government’s page on tax when you sell shares.

Who are the collaborators involved in an employee benefit trust?

Three parties are involved in an employee benefit trust: the business, the trustee and the beneficiaries. The business is responsible for funding the employee benefit trust via interest-free loans to purchase shares, contributing to the funding of the EBT. Let’s explore each of these in turn:

The business

The business is responsible for funding the EBT share pool through interest-free loans. By funding the EBT, this means that the trust can acquire shares. These loans can be made through a third-party financial institution and usually come with specific terms for repayment when the EBT sells its shares.

The beneficiaries

The beneficiaries of the employee benefit trust are the employees themselves. Additionally, they can also be former employees or relatives of an employee. They are the people receiving the shares of the EBT. Beneficiaries may gain access to the benefits or funds held in the trust once certain conditions or criteria are met. Beneficiaries may have an equitable stake in the EBT, while the trustee owns the EBT.

The trustee

The trustee is a central collaborator in an employee benefit trust. The trustee is responsible for managing the EBT on behalf of the beneficiaries. For the trust to be robust against HMRC scrutiny, it is best practice to appoint at least one professional independent trustee rather than relying solely on company directors. The trustees manage the EBT and may have to place their beneficiaries’ interests first.

How does an EBT work?

Here is how these three parties work together to operate the trust. The EBT is typically funded by loan contributions from the business. The trustee manages and invests the funds contributed to the trust, which may include shares or other assets.

Purpose of an employee benefit trust and associated risks

This section explores the purpose of an employee benefit trust. We also look into some of the risks associated with EBTs. Understanding the risk involved with EBTs is crucial for any business considering their implementation.

What is the purpose of an employee benefit trust?

There are many reasons why an EBT might be the right choice for your organisation. Here are some of the most common reasons:

• Holding shares as an incentive plan
• Employee benefit trusts can facilitate employees participating in incentive and share ownership plans
• Bonus deferral arrangements
• Growth share arrangements
• Joint share ownership plans
• Payment of discretionary bonuses

The risks associated with an employee benefit trust

There can be huge benefits to employee benefit trusts, but there are also risks associated with this type of trust. As we have previously explained, EBT arrangements are created in accordance with certain regulations and laws in the UK.

Next, we explore some of the other risks that EBTs can pose to employers:

The financial risks associated with EBTs

With an EBT, there is typically a transfer of assets and money from the business to the trust. Properly managing transfers helps ensure compliance and avoids costly HMRC settlements, including loan charges and penalties.

If the loans or benefits received through EBTs are not repaid, they may be classified as earnings and taxed accordingly, which can increase the amount you need to pay.

Some businesses may not be able to afford to pay large tax bills or loan charges, which can lead to financial distress or even liquidation. If a company enters liquidation, the trust’s assets may be protected, but financial risks for the business and individuals remain.

The settlement process with HMRC can be complex and may involve negotiating how much needs to be paid or repaid to resolve outstanding liabilities. Again, to learn more and remain up to date over time, please visit the UK government’s website.

Offshore EBTs

Offshore EBTs now carry an extremely high risk. They are often flagged under the Disclosure of Tax Avoidance Schemes (DOTAS) and are subject to intense HMRC litigation. For more information, please visit the HMRC’s page on how to identify tax avoidance schemes.

Types of EBT schemes

Once you have decided if an EBT scheme is right for your business, it is time to consider the different types available. Employee benefit trusts come in several forms, each designed to meet different company objectives and employee needs. The most common types of EBT schemes include discretionary trusts, employee share trusts and growth share arrangements.

Discretionary trusts

A discretionary trust is a flexible arrangement where the trustee has the authority to decide how and when to distribute the trust’s assets among the beneficiaries, who are usually employees, former employees or their relatives. This flexibility allows the company to tailor benefits to individual circumstances, supporting both current and former employees in ways that best serve their interests.

Discretionary bonus schemes

Discretionary trust arrangements can be used to manage bonus schemes. Discretionary bonus schemes allow trustees to award bonuses to employees at their discretion. This approach gives companies the flexibility to reward outstanding performance, making discretionary bonus schemes a potentially effective retention strategy.

Employee share trusts

Employee share trusts are specifically set up to hold shares in the company for the benefit of employees. By giving employees a stake in the business, these trusts help align the interests of employees with those of the employer, fostering a sense of ownership, long-term commitment, increased engagement and satisfaction.

Growth share arrangements

Growth share arrangements are another popular type of EBT scheme. These arrangements reward employees by granting them a share in the future growth of the company’s value. This can be a powerful incentive, encouraging employees to contribute to the company’s growth and share in its achievements.

Each of these EBT schemes offers unique benefits and can be adapted to suit the specific goals of the business and the needs of its employees and beneficiaries.

Common structures and variations

Most modern EBTs are now used as pools for shares within tax-advantaged schemes, such as Enterprise Management Incentive (EMI) or Share Incentive Plans (SIP). This is because since the Finance Act 2011 and the 2019 Loan Change, EBTs are typically no longer used for cash loans or ‘tax-free’ bonuses. Here is how businesses can use some of these government-approved tax-advantaged schemes:

Enterprise Management Incentives

According to the UK government, from April 2026, the EMI scheme is being significantly expanded to support ‘scale-up’ businesses. Qualifying companies can now have gross assets of up to £120 million (up from £30m) and up to 500 employees (up from 250).

The total value of shares a company can have under EMI options has also doubled to £6 million. Also, the exercise window has been extended to 15 years.

Share Incentive Plans

Share Incentive Plans give employees the opportunity to buy and sell shares. The UK government says that if your employees buy shares through a SIP and keep them in the plan for five years, they may not have to pay tax or National Insurance on their monetary value. Employers can use four different Share Incentive Plan types:

• Free shares: employers may be able to give employees £3,600 of free shares in any tax year.
• Partnership shares: this means that employees can buy shares with their salary before tax deductions. There can be a limit to how much they can spend, which can be either £1,800 or 10% of their taxable income for the tax year, whichever is lower.
• Matching shares: employers may be able to give employees up to two free matching shares for each partnership share they buy.
• Dividend shares: employees might be able to buy more shares with the dividends they get from free, partnership or matching shares.

Choosing the right scheme for your business

Selecting the right employee benefit trust scheme can be an important decision for any company. Businesses need to consider what type of benefits they want to provide and the potential tax implications for both the company and its employees.

Think about choosing an EBT scheme that fits with the company’s overall strategy and supports its long-term goals. Companies may also have to take into account the needs and expectations of their employees, ensuring that the chosen scheme delivers real value and motivation.

A well-designed EBT scheme can offer employees long-term share ownership, which can greatly increase employee engagement and support for business growth. By taking a careful, informed approach, companies can create a scheme that rewards employees, protects the business and complies with regulations.