What are the practicalities of running an Employee Benefit Trust?
An Employee Benefit Trust can be used for a wide variety of assets. It’s usually utilised for large companies who want to set up employee benefits without it having a major tax impact on the employees. People can put in millions of pounds, for instance, for setting up sportsgrounds and things like that for their companies. But it can also be used by smaller companies. We utilise it mainly for inheritance tax purposes and usually the assets that go into an Employee benefit trust are the shares of a Family Investment Company.
Like any other discretionary trust, the shares can be passed to an EBT using holdover relief. This effectively means that capital gains that’s imbedded in the share portfolio can be deferred for125 years which is the length of an Employee Benefit Trust. This is especially beneficial for property landlords where there’s usually a lot of capital gains embedded in the shares.
It’s really very beneficial for property landlords who may have accumulated a massive capital gains tax liability by owning properties for 20 years or so.
Original shareholder must not benefit from an EBT
The directors who pass the assets to the EBT must not benefit by getting the shares back again. Those directors are usually the people who set up the company and owned the properties, they pass the shares of the company to the EBT and they mustn’t take them back again otherwise that would be a circulatory regime and therefore it will fail as far as HMRC are concerned.
All other employees must be able to benefit. These are usually only the family members – ideally only bloodline who are allowed to own shares and nobody else.
In some cases where there are people with large property portfolios and they need other people to help manage the company we advise the owners to set up a separate service company which then deals with those employees and there’s no issue for the Employee Benefit Trust.
Main benefits of an EBT
With an EBT we are not limited to £325,000– you can put in any figure you like. This is really sensible for people with high-value property portfolios because they are able to get them out of their estate.
The other benefit is when you make the gift it’s immediately outside of the estate – there is no 7-year waiting period. For the clients who already have their properties in a limited company, we can change it to a Family Investment Company in a week then set up the EBT and it’s immediately outside of the estate. For some people that’s highly beneficial.
The other major benefit is that the normal regime of periodic charges for normal discretionary trusts doesn’t apply to an Employee Benefit Trust. If you have a big CGT issue of the Family Investment Company, in the Employee Benefit Trust you can pass the shares back to the employees which are family members and the CGT will be levied on the person getting the shares. As long as that’s fully declared and ideally, they would use their capital gains tax allowances in any given year, then slowly but surely the CGT can be alleviated over a few years.
The last major benefit is that the CGT embedded in the shares of the company at setup is wiped out on the death of the original shareholders.
Growth in the value of the company
Because of the way we set up growth shares within Family Investment Companies, any growth in the properties is then not liable to that CGT. It’s the capital gains tax that’s embedded in the shares on the original set up of the company and that figure stays fixed and then we slowly get rid of it using recipient's’ personal CGT allowances. Over many years the original CGT can be entirely wiped out or significantly reduced. If you defer the capital gains tax over 50 years the real value of the CGT is also reduced over time just through inflation.