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How to use offshore employee benefit trusts

November 13, 2013

 

For decades, employee benefit trusts (EBTs) have been used to help organisations set money aside for the benefit of their workforce.

But in recent years, such schemes have come under increasing scrutiny from HM Revenue and Customs (HMRC) (see box), which has taken a heavy-handed approach to organisations considered to be trying to reduce their tax bill.

EBTs are discretionary trusts set up by employers to hold employee assets, such as remuneration and shares, and used to minimise employees’ income tax and national insurance obligations.

Stephen Woodhouse, a partner in the tax practice at Deloitte, says: “A private employer will often want to have an EBT because it needs to provide a market for people to sell their shares.

“Some public organisations may also have EBTs for this purpose, and to avoid the complexity of using Treasury shares.”

EBTs are also used for mergers and acquisitions.

Andy Goodman, a partner at accountancy firm BDO, says: “An employer could have made a disposal of a business and have a lump sum that is fully taxed and now wants to allocate it to employees. That is put in an outside pot [the EBT], where the directors will no longer be able to touch it.”

EBTs can also protect assets from creditors in the event of an employer going into administration.

Offshore trusts

In most, but not all, cases, EBTs will be set up offshore.

Nigel Davies, a consultant at law firm Charles Russell, says: “If a trustee is UK-registered and it acquires an asset from an employer to satisfy a future share liability and then the share price goes up and [the trustee] disposes of the asset in settling the option, then technically it makes a capital gain, which could be taxable.

“If it is a non-resident trustee, it cannot make a capital gain that would be taxable, so there is potential for erosion if you have an onshore trustee. The trustee would have to pay the tax liability and the employee would get a smaller profit.”

 
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The Pensioneer Trustee Company (Guernsey) Limited is licensed by the Guernsey Financial Services Commission under The Regulation of Fiduciaries, Administration Businesses and Company Directors, etc. (Bailiwick of Guernsey) Law, 2000 and subject to The Pension Licensees (Conduct of Business) & Domestic and International Pension Scheme and Gratuity Scheme Rules (No.2) 2017.