What is an employee benefit trust (EBT) ?
It is possible to utilize employee benefit trusts within a family investment company. It is usually set up as a trust on behalf of the employees of a company for the benefit of those employees. Employee benefit trusts are usually set up by large companies but a small company can also benefit greatly for avoidance of capital gains tax on property portfolios..
Uses of an employee benefit trust
For example: Tesco wants to set up a sports ground for its employees. It proceeds to vest a few million pounds in the trust, buys the land, sets up a sports ground, and then the employees can use it.
There are tax advantages for building the sports ground in that manner, but the rules for large companies are the same as for small companies.
When you have a rental portfolio that you have put into a family investment company, what you are usually doing is swapping the value of the properties for shares in the company. You can then set up an employee benefit trust once your family investment company is fully incorporated. Following the trust set up, you can vest some (or all) of the company shares into that employee benefit trust.
Advantage of employee benefit trusts in relation to capital gains tax (CGT)
You are allowed to claim holdover relief, which allows you to put shares into a trust without generating capital gains (It defers the capital gains, the capital gains tax is not lost, it is still in the value of the shares). It could continue for 100 years without any increase in the CGT liability thus reducing the value of the tax impact due to normal inflation.
Structure of the employee benefit trust for family investment companies
The employees are your children and your grandchildren and they can benefit from the trust and subsequently the shares held in that trust.
This is a method of getting the shares out of your own name for IHT purposes, because if you retain the shares, there will be IHT liability, as the shares would still form part of your estate. If you gave the shares away to your children, capital gains tax (CGT) gets generated. The employee benefit trust allows you to put the shares into a trust, without the CGT being generated.
Main Benefits to using an employee benefit trust
The main point of an employee benefit trust is for rental properties held in a family investment company. It avoids the capital gains tax being generated on the disposal of the shares and they are outside of your estate with immediate effect. There is no 7 year waiting period for a gift of share to an EBT.