How does EBT avoid CGT

How does an Employee Benefit Trust avoid Capital gains tax both on properties and/or on investments and save inheritance tax very quickly?

Table of contents

How does an Employee Benefit Trust avoid Capital gains tax both on properties and/or on investments and save inheritance tax very quickly?

An Employee Benefit Trust is often set up for people with property portfolios who have made significant capital gains on their properties. CGT has become a serious issue for property landlords since the capital gains tax allowance was reduced in November 2022. This is also true for people who have significant investment assets. If you sell or gift properties or investments the Capital Gains Tax will be immediately payable.

How can an Employee benefit Trust help?

First of all, if you have properties and you own them personally, we will need to set up a Limited Liability Partnership first because you can’t move the properties immediately into a company otherwise the accumulated CGT will be immediately payable.  Three years later we set up a Family Investment Company and then the properties are conveyed in exchange for capital shares. These shares are different to the shares of a normal limited company in that they are set up to contain no voting rights or rights to income. Income is distributed by means of a separate class of shares called income shares. If you have an existing company, it must also be converted into an FIC first – you need to have control if you will give the shares of the company away to the Employee Benefit Trust.

Once the FIC is set up, the capital shares are then passed into the Employee Benefit Trust which is a special type of discretionary trust which must have a sponsoring employer. The employees of the company who are also the beneficiaries of the trust should only be family bloodline – children and grandchildren, and they must be paid a small monthly salary. Non-family members must not be employees because all the employees have to benefit from the Employee Benefit Trust. If other employees are required to manage a large portfolio of assets, then a separate servicing company should be set up to employ those people and then invoice the FIC for salaries and costs.

The Employee Benefit Trust achieves a number of immediate benefits. The shares pass into the EBT and are outside of your estate immediately – there is no 7-year waiting period. For people who already have existing companies this can be done very quickly and within a month you can reduce the value of your estate significantly. There is also no Capital Gains Tax to pay because we claim holdover relief as it is an option in any discretionary trust. With holdover relief this means that the CGT is not wiped out but simply deferred into the trust.

However, when the original settlor dies, the CGT dies with them. At that point – on the death of the original shareholders, a few other things can happen. As the CGT has already been wiped out, the EBT can then pass the shares of the company back to the company employees. The beneficiaries of the EBT are usually your children and adult grandchildren and they must be employees of the company. Your children can then set up their own EBT and put the capital shares back in and, if they have accumulated growth in the company and want to solve their own IHT problems, they could also put growth shares into the EBT at the time.

Due to the huge amount of Capital Gains Tax it can save within existing companies and the immediate inheritance tax benefits, an Employee Benefit Trust is very useful for professional landlords to avoid CGT and IHT; people with existing companies where they have built large investment or cash values; people who wish to move high values of assets outside of their estate without waiting the normal 7 years.

An EBT is a very useful vehicle but not cheap to set up – it can cost around £10,000 but it can save hundreds of thousands in Capital Gains Tax and inheritance tax. Due to their complexity, employee benefit trusts carry a lot of restrictions which you have to adhere to. Experienced advice must be taken.

Join our Newsletter

Subscribe and get the latest updates about inheritance tax and Estate Planning into your mailbox.

We help people with over £1 million in current assets pay ZERO in UK inheritance tax

One stop comprehensive specialist advice - Tax, financial planning and legal advice service with 18 years experience.

What our clients say
Read our 118
    

"It is gratifying to finally come across an adviser who gives sensible ongoing advice which is very client focused."

Frank Hibberd

Retired gentleman

"It is nice to know that we can now be certain that our daughter will inherit our money without giving a large slice of it to the government ."

Tony & Sue Perriss

"Everyone's situation is different but having an initial discussion with Charles has really helped me personally navigate what can be a daunting subject."

Bobby Chadda

"I particularly want to thank you for the open and transparent manner in which you have serviced my tax planning needs since I first met you seven or so years ago. In arranging my tax planning through you, I have confidence"

Michael Mahon

Retired gentleman

"Charles was really helpful from the outset and quickly clarified our situation for us... I have used Bluebond for  IHT and other tax advice and they have been very helpful with both. Charles is a very experienced and knowledgeable individual and I highly recommend Bluebond's services."

Sam Attenborough

Retired gentleman

I have used Bluebond for setting up a discretionary trust for my children as well as inheritance tax and estate planning for my home and  other properties. Having searched for years, it was only after meeting and speaking with Charles that I felt confident enough to take these next steps, and I'm very glad I did. His ability to explain complex issues in simple terms and walk you through every step of the process is quite simply unparalleled.

Imran Qureshi

Excellent and comprehensive advice concerning all things financial in one place. Enthusiastic, Educational, Expert, value oriented, Professional and Polite are adjectives that come to mind as well as great attention to detail.

Deirdre Buckley

Inheritance tax is a minefield. Charles de Lastic of Bluebond Tax Planning is the best in the business at helping you to chart the path that is right for you to ensure your estate is structured in the most tax efficient manner.

Nicholas Dickinson

Charles provides clients with valuable insights that clearly demonstrate expertise built over the years. Charles and his team guided us through a estate planning journey and then addressing complex Inheritance Tax matters. They have been very transparent with their advice and cost. Overall an excellent service. Highly recommended

Shailesh Karia

The information contained in this web site is for UK consumers only.  Like most firms of solicitors and accountants, Bluebond Tax Planning is not regulated by the FCA. The content of this website does not constitute FCA regulated financial advice and all content is provided for general information purposes only. Bluebond is not responsible for any action you may take as a result of information on this site. All advice will be delivered on a personal basis once we fully understand your situation and our client agreements have been signed.

Copyright © 2024
Copyright Notice
Legal Disclaimer
Terms & Conditions
Privacy Policy