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A simple guide to the employee benefit trust (EBT)

Employee engagement and retention play a big role in business success. Therefore, organisations look for ways to reward their staff. To do so, there are some tax-effective ways, such as employee benefit trusts, that profit both employees and employers. An employee benefit trust, also referred to as EBT, is one of the ways to retain talent within the organisation and to increase employee engagement. Read on to learn all you need to know about employee benefit trusts, from the stakeholders involved to how it works and not forgetting some essential points about EBTs that are specific to the UK.

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What is an employee benefit trust?

Employee benefit trusts have been available for decades. Although the HMRC has reduced many tax benefits, there are still some good reasons to turn towards EBTs to incentivise employees. In this section, we provide you with a simple definition of employee benefit trusts. We also highlight the stakeholders involved in an EBT and explain how it works. Read on and learn all you need to know about EBTs.

What is an employee benefit trust?

An employee benefit trust, also referred to as 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. To put it simply, the idea is to incentivise employees by boosting their loyalty to the business. The purpose is to increase the desire of employees to see 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 sector. They can be implemented alongside other incentive plans.

Who are the stakeholders involved in an employee benefit trust?

When it comes to employee benefit trusts, there are three types of stakeholders involved. These are the settlor, the trustee and the beneficiaries. Let’s explore each of these in turn:

The settlor

Often, the settlor is the business itself. As such, it can be an individual or a group of shareholders. Sometimes, the settlor is an individual shareholder within the company. In any case, the settlor is the body responsible for adding the cash into the employee benefit trust.

The beneficiaries

The beneficiaries of the employee benefit trust are the employees themselves. However, they can also be former employees or relatives of an employee. They are the people receiving the shares of the EBT. It is important to note that the beneficiaries have an equitable stake in the EBT but the trustee legally owns the EBT.

The trustee

The trustee is a key stakeholder in an employee benefit trust. As its name states, it is the person entrusted to handle the EBT for the beneficiaries. The trustee representing the beneficiaries can be an individual person, a group of people or even a company specialised in being a trustee. The trustees manage the EBT and are legally bound to place the beneficiaries’ interests first.

How does an EBT work?

As we have now explained the role of the stakeholders involved in an employee benefit trust, let’s explore how they connect together and therefore how it works. In an EBT, the settlor does not have legal control. The EBT is funded by a contribution from the business. The trustee invests it, generally through shares. The settlor should act in the best interest of the beneficiaries.

EBTs are flexible, they can adapt over time and as the company evolves.

Purpose of the EBT and risks associated with EBTs

This section goes deeper and presents in more detail the purpose of an employee benefit trust. We also look into the risks associated with EBTs.

What is the purpose of an employee benefit trust?

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

  • Holding shares as an incentive plan
  • Bonus deferral arrangements
  • Growth share arrangements
  • Joint share ownership plans
  • Internal market arrangements, including exemption from capital gains tax
  • Payment of discretionary bonuses

The risks associated with an employee benefit trust

There are huge benefits to EBTs but there are also risks associated with this type of trust. Below is a snapshot of these risks. It is essential that they are considered before making the decision to launch an EBT.

The legal and regulatory risks of EBTs

The legal requirement on EBTs present risks of non-compliance for businesses. As such, they might be subject to penalties. These penalties might also have a negative impact on the reputation of the organisation.

The financial risks associated with EBTs

With an EBT, there is a transfer of assets from the business to the trust. This transfer needs to be managed well. If this is not the case, there might be financial losses on both sides.

Risks linked to the management of an EBT

The management of an EBT is not straightforward. As there are many complexities to an EBT, it is safer to get it managed by a specialist who has the necessary expertise.

Elements of EBTs that are specific to 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. As covered earlier in this article, organisations use employee benefit trusts to provide tax-efficient bonuses to their employees. They also use them for share schemes and other types of benefits. However, to be able to do so, they need to meet specific conditions. It is essential that the EBT is set up and is managed in compliance with these rules and regulations. In the UK, EBTs are subject to the Trustee Act 2000. This act defines the duties and the responsibilities of trustees. For example, it states that trustees of an EBT should act in the best interests of the beneficiaries. When managing the trust, they should do so with care. There are also tax implications that any business desiring to launch a EBT should be aware of.

Implementing an employee benefit trust has many benefits for both employees and employers. However, there are also some risks associated with EBTs. It is important to be aware of these risks in order to minimise them. One example of how employee benefit trusts can be valuable is that they receive favourable corporation tax treatment. If you are looking into opening an employee benefit trust, make sure that you have the knowledge and perhaps even contract a specialised agency to assist you in this process. Also keep in mind that there are many other benefits that an organisation can offer its employees. Take a look at the content below for more on this topic:

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