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HMRC internal manual

Trusts, Settlements and Estates Manual

Trusts for particular purposes: employment-related trusts - employee share ownership trusts (ESOTs)

A company may operate an employee share ownership plan that is not an approved profit sharing scheme. It may do this by setting up a trust to acquire and distribute shares in the company to its employees. This is known as an employee share ownership trust (ESOT).

An ESOT should be dealt with by the Trust Office linked to the founding company’s tax office. The founding company tax office should arrange for a trust file to be opened in the appropriate Trust Office as soon as it becomes aware of the existence of the trust. In the case of a QUEST, ESSU will have notified the Trust Office direct.

For an ESOT that is not a QUEST, the founding company’s tax office should advise tax offices dealing with the other companies in the founding company group (within the meaning of paragraph 4(9) Schedule 5 FA 1989) of the Trust Office and SA reference of the trust. If a tax office dealing with any other company in the group becomes aware of the existence of an ESOT but has not been given the Trust Office and SA reference, it should advise the founding company’s tax office.

The founding company tax office should ascertain when the trust was established. It should determine whether the founding company was UK resident and not controlled by another company at that time. The information should be passed to the Trust Office.

An ESOT is a qualifying ESOT (commonly called a QUEST - see BIM44065 et seq; external customers can find this information at www.hmrc.gov.uk/manuals/bimmanual/BIM44065.htm et seq) if it meets certain conditions at the date the trust deed is executed. These are at FA89/ Schedule 5 and Employee Share Scheme Unit (ESSU) Room G52, 100 Parliament Street, London SW1A 2BQ must confirm that the trust is a QUEST before any amount claimed under FA 89/S67 can be allowed to a company as a deduction for Corporation Tax purposes. The instructions are at BIM44110 onwards detail the action the tax office dealing with the founding company should take where such a deduction is claimed.

NOTE - Relief under FA89/S67 is not applicable to contributions made to an ESOT that qualified under FA89/Schedule 5 in any accounting period commencing on or after 1 January 2003.

Relief for contributions to an ESOT that is not a QUEST (or to a QUEST for which a deduction is not being claimed under FA89/S67) is covered by the instructions at BIM44130 and BIM44140 et seq. (External customers can find this information at www.hmrc.gov.uk/manuals/bimmanual/BIM44130.htm and www.hmrc.gov.uk/manuals/bimmanual/BIM44140.htm et seq).

Action in Trust Office

The appropriate Trust Office (TSEM1420) deals with the liability of the trustees. This applies to both ESOTs and QUESTs. It must issue trust returns annually, even if the ESOT is a QUEST.

Set the case up in the normal way (TSEM1410). Prepare 3 copies of the summary sheet for a general employee benefit trust (TSEM5055). It is available as a template. If the trust is a QUEST, add ‘(QUEST)’ after the name. Retain one copy of the summary in the Permanent Notes folder of the trust file. Issue one to the tax office for the company and one to the employment income tax office.