Companies often struggle to find structured ways to reward staff and benefit employees in sustainable ways. After all, beyond compensation there are not many avenues for giving benefits to employees. One mechanism to reward employees and build long-term loyalty is an Employee Benefit Trust (EBT). I know – it sounds complicated. EBTs can actually be valuable vehicles for companies to encourage, reward and develop the employees they want.

What Is an Employee Benefit Trust (EBT)?

An Employee Benefit Trust (EBT) is a type of discretionary trust that is established by an employer to provide benefit(s) to pay current and former employees (and in some cases, to their families). In effect, it’s a trust fund that is managed by trustees for the purpose of providing benefit(s) to employees and former employees.

The trust is established and funded by the employer, and the trustees determine whether and when to apply any benefit to any employee – the benefit structure can look like anything from the employer; financial bonuses to stock options, retirement benefits, with educational or welfare support offered to the employee’s family.

What is the Purpose of an EBT?

There are a number of reasons employers may wish to establish an EBT – effectively, the EBT structure offers a flexible approach for employers making decisions about how to reward employees, is structured so that in most cases tax is much less than salary, and established employee benefits serve the following common purposes:

• To incentivise / motivate employees – bride the two together. Rewarding the employee for performance, or in a perfect world, rewarding the employee as the company values growth or overall worth over time.
• To retain talent – benefit(s) that establish employee retention.
• To succession plan – assistance with ownership transition.
• Offering a welfare benefit: Payment of education costs, health, or hardship relief.

How EBTs Works?

• Employer contribution: The business contributes funds into the trust.
• Trustees: Independent trustees control the trust and determine how benefits will be paid.
• Employee benefit: Employees are the beneficiaries of the trust, but have no control over it.

The overall adaptability of EBTs means they can be structured in as many ways as required by the size, structure, and objectives of the company. For example, some EBTs have a larger share component where an employee receives shares reliant on the company’s performance; other EBTs have a larger monetary component or welfare component.

Benefits of Employee Benefit Trusts

• Employee loyalty and connection: Employees feel valued and engaged with the business.
• Recruitment tool: The additional benefits provided by an EBT will pursue savvier talent.
• Succession planning: EBTs help achieve ownership transfer in private businesses.
• Flexibility: The trust can be structured to meet specific requirements.

Potential Disadvantages & Things to Consider

Despite the advantages, there are some potential disadvantages of EBTs:

• Complexity: Offering an EBT requires a legal, financial, and taxation understanding.
• Cost: EBT start-up and ongoing administration costs can be substantial.
• Tax implications: EBTs have been scrutinised and misunderstood by tax authorities as a tax avoidance structure instead of a bona fide employee benefit.

Employee Benefit Trusts and Taxation

Previously, some businesses took a highly aggressive approach to using EBTs which facilitated a lot of tax avoidance. (HMRC clamped down on EBTs leading to far more stringent rules)

Nowadays EBTs are still a useful tool albeit better structured and less aggressive in light of the regulatory developments in previous years. No matter how an employer seeks to implement an EBT scheme employers should always seek professional advice.

Conclusion

An Employer Benefit Trust (EBT) can represent a great opportunity for a company to reward and support key employee(s), but it can also improve loyalty and engagement as well as drive and deliver long term growth. When implemented correctly (legally), an EBT can represent a “win-win” for both employer and employee. However, it can be difficult and require careful planning to set-up, hence it should only be done with the appropriate professional advice.

By understanding the nature of an EBT and how they work, the employer can appreciate how they can shape a fair and meaningful role of benefits in the workplace. The same applies to employees who can appreciate what an EBT is and how EBTs operate.

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