Have you ever wondered how some of the most successful businesses around the world manage to maintain an incredibly loyal workforce? It is not only about the pay; it is about belonging. Every company is always on the lookout for ways to reward its workforce, and that is exactly where the concept of trust comes in. You may have heard terms like “employee ownership” and “share schemes” thrown around by business gurus. But did you know that statistics show that companies with high employee ownership shares have seen an incredible 20% increase in productivity? It is a fantastic way of making your employees partners in the success of your business.
Additionally, it is a brilliant way of managing shares without going through the tedious process of constantly buying and selling shares individually. It is a win-win for everybody involved in the business’s success. In this article, we will explore “what is employee benefit trust” and how they can contribute to the success of your business. So, let’s begin!
Introduction to Employee Benefit Trusts
An employee benefit trust, also known as an EBT, is like a safety net and a treasure chest all rolled into one. It is a contractual agreement with a third party who sets aside assets, normally shares or cash, for those who make a company tick. It is not the company’s shares, it is a trust with shares as part of it, with the intention of motivating employees. Here’s what it does:
- Legal Backbone: It provides a discretionary trust, which means that the trustees can choose the best way to utilize the assets for the workers. This provides a legal backbone to ensure that it operates according to a set of predetermined rules.
- Asset Protection: Since it is a separate entity, the assets will always be protected, even in situations where the company faces financial difficulties. This provides employees with peace of mind knowing that their rewards are protected from all business risks.
- Flexibility: These can range from small startups to big corporations with thousands of employees. You can set it according to your company culture and business goals.
- Motivation Tool: It provides a link between the company and the rewards received by the employees. If the company does well, then the assets in the trust grow, and everyone can celebrate.
- Tax Efficiency: If it is set up correctly, it can offer several tax advantages to the company and the employees. These can then be reinvested in the company or provided to the employees as rewards.
Furthermore, these trusts are not just for the big players. Any company that wants to plan for the future and take care of its employees can set up an EBT.
What Are Employee Benefit Trusts (EBTs)?
Definition of EBT
So, if you are wondering what an employee benefit trust is, let’s say that it is a pool of resources set aside by the company. More precisely, an EBT is “a discretionary trust established by an employer to provide for the benefit of their employees, and sometimes their families too.” This allows the company to reward its employees without relinquishing “legal” control of the shares to every single employee immediately.
Who can establish an EBT
This is a bold move for any forward-thinking business leader, and the most common founders of EBTs are:
- Private companies: Small to medium-sized businesses use EBTs to administer internal share markets. This allows them to reward their employees with equity without the expense and hassle of going public.
- Public corporations: Large companies use EBTs to meet the demands of their stock options. They use the trust to purchase shares in the public market to prevent diluting existing shareholders.
- Founding members: Sometimes, the shareholders themselves become the “settlor” to establish the trust. This is a popular way for founders to initiate their exit strategy and reward their loyal team members.
- Group holdings: Sometimes the holding company sets up an EBT to provide for all its daughter companies. This ensures an effective and consistent employee benefit strategy for all branches of the large organisation.
- Partnerships: Even partnerships use EBTs to achieve their long-term profit-sharing goals. This allows law and accounting partnerships to transfer ownership to the next generation of partners smoothly.
Typical Beneficiaries
At the heart of any trust is the recipients of its benefit. In the case of an employee benefit trust, these will typically include:
- Current Staff: All current employees, from the newest employee to the CEO, can be included. This helps to create a team environment where everyone feels they are contributing to a common cause.
- Former Employees: These are also included, which helps to ensure that past contributions to the company are remembered and appreciated.
- Close Relatives: In some cases, the family of the employee can also benefit from the trust. This helps to ensure that the employee and their family are provided for.
- Legal Dependants: These are also included to ensure that the employee benefit is passed to the person who needs it most in the event of unexpected circumstances.
- Specific Groups: In some cases, it can also be set up to only benefit the senior management team. This helps to ensure that special incentive packages can be put in place for these individuals.
Difference Between EBT and Regular Employee Incentive Programs
| Feature | Employee Benefit Trust (EBT) | Regular Incentive Program (e.g., Cash Bonus) |
| Asset Holding | Assets are held by an independent trustee. | Paid directly from the company’s bank account. |
| Duration | Designed for long-term growth and succession. | Usually a short-term reward for yearly targets. |
| Tax Impact | Offers significant corporation tax and CGT perks. | Usually taxed as standard income/salary. |
| Share Management | Can hold and recycle shares between employees. | Shares are usually issued fresh or not involved at all. |
| Control | Trustee manages assets in the best interest of staff. | The company retains full control over the funds. |
Key Features of an Employee Benefit Trust
If you take a closer look at what an employee benefit trust is, you will notice that it has a number of key features that make it different from a bank account. These features include:
- Independent Trustee: A third party, typically a professional firm, manages the trust to ensure that all parties are treated fairly.
- Discretionary Power: The trustees are given the power to allocate what to whom, as set out in the rules of the trust deed. This gives the trust room to address the needs of each employee or the special achievements of certain employees.
- Settlor Exclusion: The company that creates the trust cannot benefit from it, keeping it independent. This rule is essential in keeping the entire arrangement exempt from taxation.
- Funding Methods: Typically, the company will fund the trust via interest-free or low-cost loans, which are then used to purchase the shares or assets that will belong to the employees.
- Revocable Nature: Though the assets are for the employees, the trust can be modified as the needs of the company change over time. This provides a middle ground between being committed to your team and being flexible enough to change your business strategy.
How Does an Employee Benefit Trust Work?
It may sound like a lot of hassle to set up a trust, but it makes perfect sense as you read on. In fact, it is logical to ensure that all parties are protected. This is how it works:
Step 1: Appointment of the Settlor
A company decides to set up a trust. They provide the “settlement,” which is usually a small sum of money or shares, enough to get the ball rolling. This formally creates the trust.
Step 2: Choosing the Trustees
The company chooses who will be running the trust. Most businesses use a professional trust company. This is due to their experience in dealing with the complex laws and regulations governing trusts. This ensures that they do not make any mistakes in the process.
Step 3: Drafting the Trust Deed
The “Rulebook” is drawn up by lawyers. It is called the Trust Deed. It explains what an employee benefit trust is, as far as that company is concerned. It explains who can benefit from it and how. It is the guide that governs every move the trustee makes.
Step 4: Funding the Trust
The company makes a contribution or a loan to the trust. The trustees then use these funds to purchase shares in the company. This can be from existing shareholders or by buying new shares. It is then ready to be handed over as a reward to the employees.
Step 5: Holding and Managing Assets
The trustees then hold these shares on behalf of the employees. It ensures that they are ready to be handed over when someone hits a milestone or exercises a stock option. It is then ready to be handed over as a reward to the employees.
Step 6: Distributing Benefits
The assets are then handed over. This can be in the form of shares, cash, or loans to employees who need them. It is then that they see the fruits of their labour.
Benefits of Employee Benefit Trusts for Companies and Employees
The beauty of learning what is employee benefit trust and how it rewards both the boss and the team is very interesting. These include:
- Attraction Tool: It helps you attract top talent because people love having a stake in where they work. This is particularly important when you need to attract the best talent for your business.
- Retention Boost: It encourages employees to stay for a very long time since they have a growing trust fund waiting for them. This is important because it saves you from the high costs of replacing departing staff.
- Tax Deductions: You can claim corporation tax relief on the money you contribute to the trust. This is important since it is a very cost-effective way of rewarding your staff with high-value rewards.
- Succession Planning: It enables the business owner to exit the business by selling shares to the trust. This is important since it ensures the business continues to thrive under the care of the people who know it best.
- Market Creation: It is important for private companies since it enables employees to sell their shares without the need for a third party. This is important since it creates a market for the shares.
Types of Employee Benefit Trusts
Not all trusts are equal, and the selection of the one to use depends on whether one wishes to reward key employees or turn the whole workforce into a collective of owners. Depending on the business, one may use a structure that allows for the granting of shares directly or one that allows for their holding indirectly for the long term.
Employee Share Trusts (Share Incentive Plans – SIPs)
This type of trust is mainly used to hold shares of the company for distribution to employees. It facilitates Employee Share Ownership Plans (ESOPs) or even share option schemes like Long-Term Incentive Plans (LTIPs). A company can easily manage the distribution of shares to employees efficiently without immediately diluting the shares of the present shareholders.
Discretionary Bonus Trusts / Remuneration Trusts
This type of trust is used to hold cash or other liquid assets to make discretionary bonuses to employees based on their performance. It allows the company to accumulate funds during profitable times to make strategic decisions regarding its distribution to employees.
Staff Benevolent Funds
This type of trust is used to make provisions for employee welfare, such as sick pay, emergency medical attention, or even education for the employees’ children. It is a corporate kindness fund, ensuring that the employees feel the company cares for their welfare even during their personal hardships.
Pension / Retirement Benefit Trusts
This type of trust is used to manage assets for pension plans or even retirement benefits. It allows for the building of a nest egg for employees, giving them confidence for their retirement.
Master Trusts
A special entity designed to combine various types of employee benefit plans from different subsidiaries or divisions into a single, managed, and efficient trust. This will minimise administrative costs, as well as provide a unified investment plan for a large, diverse group of employees.
Nominee Trusts
In such a structure, the trustee holds the shares of the employees purely for administrative convenience and simplicity. It is much more convenient for employees to manage their shares without having to go through the legal complexities of individual share ownership.
Employee Benefit Trust Legal and Tax Framework
The only way to ensure that your trust will stand the test of time and be on the right side of the law is to get the legal structure just right. These legal documents will be the bridge between your company’s vision and the financial rewards your employees stand to gain.
- Deed Clarity: A good deed is one that can avoid disputes between the company and the trustee in the future. The deed is the ultimate rule book that ensures everyone, from the CEO to the newest intern, understands the legal protection of their shares.
- Tax Compliance: Remaining compliant with the law will ensure that you continue to enjoy your valuable exemptions, such as the one for corporation taxes for your contribution to the trust. If you fail to comply with the stringent HMRC or local regulations, you will forfeit these exemptions and end up paying huge taxes, which could have been avoided.
- Regulatory Oversight: These professional trustees will be regulated by bodies like the Jersey Financial Services Commission, adding a further layer of security for your trust assets. This way, if your business is sold or is going through tough times, your trust assets will be professionally managed and legally required to be protected for the employees.
- Reporting Duties: The trust will be required to keep a record of all its transactions to comply with its annual tax return obligations. This will also act as a way to keep your employees informed, as they will be able to see that the trust is being managed responsibly and professionally.
- Asset Valuation: Experts will be required to regularly value the shares to ensure a fair deal is achieved for all, while at the same time satisfying the tax authorities that a fair market value is being achieved for all transactions. This will prevent any claims of favoritism and ensure every employee receives a fair deal based on the true performance of the business.
Recent Changes in Employee Benefit Trust Regulations
The world of finance is constantly evolving, and it is essential to stay abreast of the latest changes to the budget to keep your trust healthy. Recent changes have been aimed at ensuring these types of trusts are being set up for genuine employee engagement, not just for accounting purposes.
- Budget Updates: The new tax rate changes implemented in the Autumn Budget 2024 (UK) and future budgets require you to consider updating your strategies to remain as effective as possible. Keeping a close eye out for the changes in Capital Gains Tax will enable you to ensure your share distribution strategies remain effective, so your employees can enjoy more of the rewards they’ve earned.
- Fairness Rules: There’s a big emphasis from lawmakers to ensure all employees benefit equally from the EBT, rather than just a select group of directors. The “all-employee” rules require you to ensure your trust is representative of all the members, thus creating a sense of unity within your workforce.
- Transparency Laws: There’s a big push for increased transparency regarding the actual controllers of the trust’s assets, making it more difficult for former owners to pull the strings from behind the scenes. This creates a sense of trust within the workforce, who see that the assets are actually for their benefit.
- Cross-Border Rules: Companies operating in multiple countries will need to ensure they remain compliant with the various tax laws regarding offshore EBTs, especially with the new global reporting requirements coming into effect. This will ensure your international workforce receives their EBT without any legal complications.
- Anti-Abuse Focus: The government is clamping down harder on EBTs used for aggressive tax avoidance rather than employee motivation. Keeping the purpose of the EBT focused on the motivation of the employees will ensure the company doesn’t become a victim of the anti-avoidance laws.
Common Misconceptions About EBTs
There is a lot of “office gossip” about trusts that can make them sound scarier than they really are. Dispelling these myths is the first step to developing a successful ownership culture in your business. These include:
- Not Just Tax: The main benefit of an EBT is employee engagement and business security, not just finding a tax loophole. While the tax benefits are an added bonus, the magic really happens when your team thinks like owners and works harder to see the business succeed.
- Scalable Costs: With the advent of new business systems, it is now much cheaper to administer these trusts. No longer will you need a team of lawyers to make this work. Instead, you can now get these services done by professionals for a fee.
- Retained Control: You can remain as directors and retain control of the business while the trust owns the majority of the shares. This way, you can have a smooth handover of the business while giving the employees the benefits of the company’s success.
- Broad Access: You don’t have to be a billionaire entrepreneur or a tech genius to set up a trust. Family-owned businesses can also benefit from using trusts as a succession plan. This is a versatile tool that can be scaled down to suit a team of twenty just as easily as a team of two thousand.
- Employee Power: Your employees benefit from the wealth creation of the business, while the complex legal work is handled by the trustee. This way, you can ensure that your team focuses on their jobs while their “pot of gold” grows quietly in the background.
Conclusion
Learning what is employee benefit trust is a changing factor for any business owner who wants to leave a legacy that will be remembered for a lifetime. It is not just a structure, but a way of saying thank you to the people who have helped you grow every single day. With an EBT, you will be able to increase loyalty, save on taxes, and ensure your business is left in good hands for a lifetime.
It is a way of turning a nine-to-five job into a partnership where everyone is a winner. It does require a bit of effort and some professional advice, but it is well worth the journey. If you want to make your employees feel like true owners of their own destiny, then EBT is the way to go!
FAQs
1. What is employee benefit trust in simple terms?
Think of it as a professional “bucket” where a company puts shares or money to be held for its workers instead of giving it to them all at once. This ensures the benefits are managed fairly by an independent party and grow in value as the company succeeds over time.
2. Is EBT the same as a pension?
No, a pension is for when you retire, but EBT is for rewards, bonuses, and shares within your current career. It is for the ‘here and now’ of business, allowing you a stake in the business you are building today.
3. Can I get cash from an EBT?
Yes, you can get cash because your trustees can either pay you cash bonuses or use the money in the trust to buy back your shares from you when you want to sell them. This gives you, as employees, a clear route to take your hard work and turn it into real money for those major events in your life, such as buying your first home.
4. Who controls the money in the trust?
Independent Trustees are in control of the money, but they are also governed by rules set out in the Trust Deed, meaning they always act in your best interests. This means that your company can’t take back the money you’ve worked so hard to earn, even if they’ve had a bad month.
5. What happens if I leave the company?
This depends on the rules, but you may be able to sell your shares back to the trust or lose your rights to the money if you leave too early. This is because most trusts will use “leaver” rules, meaning those who stick it out and contribute the most will benefit the most.
6. Do I have to pay to be part of an EBT?
In almost every case, you don’t! Most companies will fund the whole thing themselves as a reward for you, although in certain circumstances, you can buy extra shares of your company using your pre-tax salary. This is usually a free “extra” that your employer will give you as a reward for your work.
