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HMRC internal manual

Trusts, Settlements and Estates Manual

Trusts for particular purposes: employment-related trusts: summary for general employee benefit trust - resident trustees (EBT1)

This memo contains information, advice and action points for

  • the Trust Office dealing with the trust
  • the tax office for the company
  • the employment income tax office

About the trust

[Name of trust]

On [date established from 41G (Trust) or other source] [name of employer] established a trust for its employees. This type of trust is likely to be for a defined class of beneficiaries. The trustees hold as part of the fund, any capital sums that are paid to them. They may receive these from the employer or from any other person.

The Trust Office

Liability on income

Initial action: - Issue returns annually to the trustees.

Information: - The trustees are likely to have discretion to apply all or part of any income in favour of one or more of the beneficiaries. Or they may have power to accumulate all or part of the income arising during a defined period. In view of the trustees’ discretion (and possible power of accumulation) income is chargeable at the rate applicable to trusts/dividend trust rate under ITA/S479.

Where discretionary income payments are not chargeable as employment income of the recipient (see comments in ‘The employment income tax office’ below) ITA/S493 will apply. The trustees will be chargeable under ITA/S496(1) in respect of payments to beneficiaries that are within ITA/S493 after deducting the set-off under ITA/S496(3)

If payments are chargeable as employment income (see comments in ‘The employment income tax office below) the trustees may be entitled to concessionary repayment under Extra Statutory Concession A68 (see TSEM5600).

The Settlements legislation may apply if someone other than the employer makes a contribution.

The trustees are chargeable to CGT in the normal way.

Advice: - Refer any CGT problem to Capital Gains Technical Group.

Action: - If someone other than the employer pays capital to the trustees refer the case to Trusts & Estates Technical Edinburgh.

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The tax office for the company


Information: - The money that the employer provides to set up the trust is capital expenditure. It is not an allowable deduction in computing the employer’s trading profits. However, specific statutory deductions are given for the costs of settling up the following approved schemes

  • Share Incentive Plans (SIP) - ICTA88/Sch4AA/Para 7 (previously FA00/Sch8/Para111)
  • Savings-related share option schemes (SAYE) - ICTA88/S84A
  • Company Share Option Plans (CSOP) - ICTA88/S84A

Approved Profit Share Schemes (APS) - ICTA88/S84A

These specific statutory deductions are given for the accounting period in which the expenditure is incurred, except where the scheme is approved more than nine months after the end of that period. In that case the expenditure should be disallowed for the period of payment, and allowed instead in the period in which the scheme is finally approved. If a scheme has been used to grant options or transfer shares before the date of approval, the costs of setting up the scheme are not allowable.

The Employee Shares and Securities Unit (100 Parliament Street) deals with the approval of schemes and notifies offices dealing with participating companies when schemes are approved.

A specific statutory deduction for the costs of setting up a qualifying employee share ownership trust (QUEST) is given by ICTA88/S85, see BIM44135. External customers can find this information at

Subsequent contributions to the trust may be capital or revenue. General guidance on the allowability of employer’s contributions to employer related trusts is at BIM44500 onwards for EBTs and BIM44000 onwards for employee share schemes. Contributions to a QUEST are covered by BIM44065 et seq. ESSU will advise the appropriate CT Office whether contributions to a QUEST are an allowable deduction. External customers can find this information at, and

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Action for non-QUEST EBTs

You may want to consider

There may be tax avoidance opportunities if a company is ‘close’ and participators with a significant interest in it can benefit. So the second bullet point above is particularly important. It may be possible to apply the anti-avoidance Settlements legislation in Chapter 5 Part 5 ITTOIA.

Refer the case to CT & VAT (Trading and Property Income Team) if it appears the employer is using the trust to

  • obtain a trading deduction for contributions when charged, whilst
  • deferring receipt of emoluments by employees

What you need to know: -The normal commercial reason for such a trust is to provide an incentive to attract, retain and motivate good quality staff. But if there is also a non-trade purpose the employer’s contributions will not meet the ‘wholly and exclusively’ requirement in Section 34(1)(a) ITTOIA (income tax) and Section 74(1)(a) ICTA88 (corporation tax) and so will not be an allowable deduction in computing the employer’s trading profits. Examples of non-trade purposes might be if the contributions are intended solely for the personal benefit of the controlling director/s; or if one of the purposes for setting up the trust is to create a vehicle to which controlling director/s might sell their shares. This was the case in Mawsley Machinery Ltd v Robinson (SpC 170). It would therefore be relevant to find out or obtain the following

  • the employer’s purpose/s in setting up the trust
  • copies of minutes of directors’ meetings at which the decisions were taken to set up and make contributions to the trust
  • whether the existence of the trust and the criteria for benefit has been publicised to all the employees
  • what funding the employer has provided
  • how the employer’s contributions to date compare with turnover; are they realistic by reference to the number of employees or directors and the normal level of their remuneration
  • what distributions have already been made out of the trust, and have they been disproportionately in favour of controlling director/s compared to employees and other directors.

Advice: -If you need advice on the appropriate timing of any deductions due, you should consult your advisory accountant.

Action: - Submit the employer’s file to Trusts & Estates Technical Edinburgh if a trading deduction is successfully denied because a payment to the trust was not expended wholly and exclusively for the purposes of the employer’s trade. They will consider the application of the Settlements legislation.

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The employment income tax office

Employment income

Information: -The trustees may make payments of income or capital. These may be chargeable as employment income:

  • as earnings under s62 ITEPA 2003, or
  • as benefits under s203 ITEPA 2003, or
  • as relevant benefits from an employer-financed retirement benefit scheme under s394 ITEPA 2003.

Failing this they are chargeable as employment income under s401 ITEPA 2003 if they refer to

  • termination of employment, or
  • any changes in the duties of employment or earnings from employment.

If the payments are employment income, the trustees should operate PAYE on any cash payments that they make if the trustees are treated as an employer by virtue of Regulation 11(1)(a) or 12(1)(a) of the Income Tax (Pay as you Earn) Regulations 2003, SI 2003, SI 2003/2682. But, it is usually more convenient for payments to be made via the employer’s PAYE scheme.

As well as, or instead of, making cash payments the trustees may provide benefits in kind for the beneficiaries or their families. For example, they may make a low interest or interest free loan. Any such benefit will normally be chargeable on employee or director beneficiaries in the same way as if the benefit had been provided by their employer.

Advice: - Refer to PAYE SA and NICs Group, Employment Income (Technical) Solihull any problems about the employment income implications of

  • discretionary payments
  • the granting of loans/options
  • the transfer of any shares
  • the provision of other benefits in kind

to beneficiaries.

Refer any problems about the employment income implications of payments or benefits from an employer-financed retirement benefits scheme to Pension Scheme Services. Fitzroy House, Castle Meadow Road, Nottingham NG2 1BD.

Refer any problems about the operation of PAYE to PAYE SA and NICs Group, PAYE Process Team, Shipley.

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Non-employment income

Information: -For payments which are not employment income ITA/S493 may be in point. It only applies to annual payments chargeable Case III Schedule D (because of the words ‘in lieu of Section 348 or 349 (1)’).

Capital payments are not income of the recipient for income tax purposes (see Stephenson v Wishart 59 TC 740). They are outside Case III, Schedule D.

Income payments are income of the recipient under Case III Schedule D. They include payments of an income nature in connection with termination of employment. These fall within Case III Schedule D and not s401 ITEPA 2003 (which only applies to payments ‘not otherwise chargeable to tax’). They fall within S687. The measure of income is the payment grossed at the rate applicable to trusts at the time of payment.

Advice: -Refer any problem about non-employment income payments to beneficiaries, or any contention that a payment to a beneficiary is not taxable, to Trusts & Estates Technical Edinburgh.

Action: -Inform Trusts & Estates, Technical Group, Meldrum House, Drumsheugh Gardens, Edinburgh of any capital payments to beneficiaries.

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National Insurance contributions (NICs) position

For information about the NICs position on payments out of an EBT, see NIM04012 and SCS2/01; NIM02404 and SCS75/05. For external customers the links are at and

Advice: - Refer to PAYE, SA and NICs Technical Newcastle any problems about the NICs implications of

  • discretionary payments
  • the provision of loans
  • the granting of options
  • the transfer of any shares
  • the provision of other benefits in kind

to beneficiaries.

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Disclosure of Tax Avoidance Schemes and AAG Intranet

Employee benefit trusts are often used to facilitate avoidance of PAYE/NI and CT liabilities. The disclosure of tax avoidance schemes introduced on 18April 2004 requires promoters of schemes subject to the regulations to disclose them to AAG (Disclosure and Risk) within 5 days of their being made available to a prospective user. Users of disclosed schemes are identified through notification of an 8 digit Scheme Reference Number (SRN) issued by the AAG. In most instances this is reported direct to the AAG who inform the Lead Office responsible for co-ordinating enquiries. However some employers report the SRN on their CTSA Return or within computations. If you identify an SRN please refer to the Disclosed Scheme pages of the AAG Intranet site, click on the SRN, and follow the advice given. The Current Schemes page also contains details of known employee benefit trust schemes and advice on action to be taken.