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HMRC internal manual

Business Income Manual

Specific deductions: Employee Benefit Trusts: used with employee share schemes

EBTs set up in conjunction with employee share schemes are commonly called Employee Share Ownership Trusts (ESOTs) or Employee Share Ownership Plan (ESOP) trusts.

Shares in employing company or group

The shares acquired by the trust will typically be in the employing company or another company in the same group as the employing company.

ESOTs set up to hold and distribute such shares to beneficiaries are used for a variety of purposes. For example if the shares are in an unquoted company they may be used to:

  • provide a market for employees’ shares that otherwise may not exist,
  • maintain shareholder control and limit the possibility of unwanted take-overs which might occur if shares were sold to outside parties,
  • help with business succession planning and management buy-outs.

Quoted and unquoted companies may also use ESOTs to hold such shares (existing shares bought in the market and/or newly issued shares) to transfer to employees when they exercise share options or when they become entitled to share awards under employee share schemes.

Guidance on deductions relating to employee share schemes is at BIM44000 onwards.

Shares not in employing company or group

In recent years Employee Benefit Trusts have increasingly been used to hold and distribute shares in off-the-shelf companies whose values can most easily be manipulated. The main aim of the arrangements is to secure a tax deduction for the employer’s contribution which the trustees use to acquire the shares, whilst minimising the amount of the share-related benefits received by key employees on which Income Tax and National Insurance Contributions (NICs) are payable.

Examples of arrangements aimed at manipulating share values at the time that share-related benefits become chargeable to Income Tax and NICs are:

  • Conditional (forfeitable) share schemes - under which dividends may be paid to employees (often instead of a bonus), so seeking to shift value out of the employees’ shares before the occasion which gives rise to Income Tax and NICs liability.
  • Value shifting (discounted option) schemes - under which value is shifted out of shares before the employees acquire them by granting options over unissued shares in the same company. Value is then shifted back into the shares after the employees acquire them, typically by options granted to their family trusts being allowed to lapse.

The employment Income Tax and NICs advantages sought by using such schemes are countered by Part 7 Income Tax (Earnings and Pensions) Act 2003.

The tax advantages sought by the employer are countered by S1290-S1297 Corporation Tax Act 2009. The legislation broadly aligns the timing and amount of the employer’s deduction with the timing and amount on which the employee is chargeable to Income Tax and on which NICs liability arises.  Additional rules apply to employee benefit contributions made or to be made on or after 1 April 2017 (CT) or 6 April 2017 (IT).  These rules may prevent a deduction being allowable at any time, even when qualifying benefits are provided.  This is explained more fully at BIM44571 and in the example at BIM44611

Guidance is at BIM44575.