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HMRC internal manual

Business Income Manual

Specific deductions: employee benefit trusts: introduction

An employee benefit trust (EBT) is usually a discretionary trust set up by an employer for the benefit of its employees and directors. Where the employer is a member of a group of companies the trust may be set up by the parent company in the group, for the benefit of employees of all or selected group companies.

Establishing an EBT

An EBT is established when the person setting it up (the ‘settlor’) settles property, usually by transferring a nominal sum of money to the trustees.

EBTs may be established within or outside the UK, and under UK or foreign law. A UK resident EBT is liable to Income Tax and Capital Gains Tax in the same way as any other discretionary trust. A non-UK resident EBT (an ‘offshore trust’) is only liable to UK Income Tax on its UK source income and is not liable to UK Capital Gains Tax.

Trustees

The company or business establishing the trust will appoint the trustees, who may be directors, employees or independent persons. In some cases the trustee may be another company (a corporate trustee) in the same group as the company which set up the trust. The trustees are likely to have discretion to apply all or part of any income in favour of one or more persons within the class of beneficiaries defined in the trust deed.

The trust fund

The trustees will hold as part of the trust fund:

  • the initial amount settled to bring the trust into existence,
  • subsequent contributions from the employer, and
  • sums paid to the trustees by other persons.

Beneficiaries

The defined class of beneficiaries under an EBT, in addition to current employees and directors, will commonly also include ex-employees and ex-directors, spouses and minor children.

The trust deed will also specify a ‘residuary beneficiary’ (usually a charity such as the Red Cross of Geneva) to whom the trust fund is to be distributed when the trust is wound up, if at that time there is no longer anyone within the defined class of beneficiaries.

Perpetuity period

EBTs set up with UK resident trustees will have a life of up to 80 years (the ‘perpetuity period’) in accordance with the Perpetuities and Accumulations Act 1964 or up to 125 years under the Perpetuities and Accumulations Act 2009 if set up on or after 6 April 2010, although they may be wound up earlier than that. Trusts set up offshore may have longer perpetuity periods.