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HMRC internal manual

Trusts, Settlements and Estates Manual

HM Revenue & Customs
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Trusts for particular purposes: employment-related trusts -summary for employee benefit trust- non-resident trustees (NRT39)

This memo contains information, advice and action points for

  • Trusts and Estates Nottingham
  • the tax office for the company
  • the employment income tax office

About the trust

[Name of trust]

On [date established from 41G (Trust)] [name of employer] established a trust.

The following points normally arise in this type of case.

It 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. If someone other than the employer pays capital to the trustees, refer the case to the Divisional Technical Adviser CAR Residency.

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.

Trusts and Estates Nottingham

Issue returns annually to the trustees so long as they receive UK income.

In view of the trustees’ discretion (and possible power of accumulation) income is chargeable at the trust rate/dividend trust rate under ITA/S479.

If a UK resident trustee is appointed transfer the case to the relevant Trust Office - TSEM1420.

The tax office for the company


The money that the employer contributes to set up the trust is capital expenditure. It is not an allowable deduction in computing the employer’s trading profits.

General guidance on the allowability of employer’s contributions is at BIM44500 onwards for EBTs and BIM44000 onwards for employee share schemes. (External customers can find these links at and ) The main issues to consider are

  • whether the contributions are revenue (not capital) expenditure
  • whether they are wholly and exclusively for the purposes of the employer’s trade
  • for contributions that satisfy the above two tests, the timing of any deduction due. Deductions may be deferred by Schedules 23 and 24 FA03 (see BIM44000 onwards and BIM44500 onwards). External customers can find this information at onwards and onwards).

As non-resident trustees act 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.

Refer the case to CT and 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; particularly why it is offshore
  • copies of minutes of directors’ meetings at which the decisions were taken to set up and make the contributions to the trust
  • whether the existence of the trust and the criteria for benefit has been publicised to the employees
  • what funding the employer has provided
  • how the employer’s contributions to date compare to 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.

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

Submit the employer’s file to Trusts & Estates Nottingham 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. Also inform Trusts & Estates Technical Group, Edinburgh.

The employment income tax office

Employment income

The trustees may make payments of income or capital. These can 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 scheme under s394 ITEPA 2003 or
  • as specific employment income based on employment-related securities and options set out in Chapters 1 to 10 Part 7 ITEPA 2003. Shares under approved schemes or EMI may be exempt.

Failing this they can be 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 payment is employment income PAYE should be operated on cash payments. But, the non-resident trustees cannot be required to do this. The employer must operate PAYE by virtue of s687(4)(b) ITEPA 2003. The employment income tax office should ensure the employer is aware of its obligations. Refer any problems with the operation of PAYE to PAYE and NICs Group, PAYE Process Team, Shipley.

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.

Refer to PAYE 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 to Employee Shares and Securities Unit (Room G52 100 Parliament Street) any problems involving employment-related securities or options.

Non-employment income

Capital payments

Capital payments are outside Case V Schedule D. But consider S740 ICTA 1988 if

  • a capital payment is made to a UK beneficiary, or
  • a benefit is provided for a UK beneficiary,

and the value received is not fully taxable as employment income.

Inform Trusts & Estates, Technical Group, Edinburgh of any capital payments to beneficiaries.

Income payments

Income payments are income of the recipient under Case V Schedule D.

This includes payments of an income nature that refer to termination of employment. These fall within Case V Schedule D and not s401 ITEPA 2003. The provisions apply only to payments ‘not otherwise chargeable to tax’.

Refer any problems about non-employment income payments to CAR Residency,

Claim that payment is not taxable

Refer to Trusts & Estates Nottingham any contention that a payment to a beneficiary is not taxable.

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. (External customers can find this information 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.

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 18 April 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.