EBT & EFRBS

The following areas are very complex and not suitable for the majority of clients, very specific advice and warnings will be provided should a client wish to discuss these areas.

EBT (Employee Benefit Trust)

An EBT is a tax efficient, flexible way to reward and incentivise key members of staff. Instead of paying bonuses directly to employees, the employer makes more creative use of the bonus pool by contributing to an EBT.

Key Features

  • An EBT is an alternative to paying bonuses direct to employees. A cash sum may be attractive to some employees but it will be liable for income tax, employer's and employee's National Insurance contributions (NIc). Under an EBT the bonus pool is transferred into trust and the trustees can then allocate the funds to sub-funds for employees. The sub-funds can be invested flexibly or can even be lent to the employees concerned. The employer is likely not to qualify for a corporation tax deduction on funding the EBT but at that time there will be no income tax charge on the employee nor any employer's or employee's NIc to pay.
  • The employer establishes an EBT for the benefit of all its employees and their families. The EBT will establish sub-funds for each participating employee. Assets can be allocated to the individual sub-funds at the discretion of the trustees after consideration of recommendations from the employer.
  • The benefits to be provided can be tailored to suit each employee's personal circumstances. However in order for the maximum advantage to be obtained, the employee should view the EBT as a lifetime planning structure under which the capital is not distributed as a cash payment.
  • During employment, interest-free loans can be made on which, at current rates, the employee will be subject to an effective rate of income tax of 1.9% per annum on the loan outstanding. Loans can be made at the UK official rate of interest (currently 4.75% p.a.), however this will result in no liability arising. Post employment interest-free loans should be outside the benefit in kind regime that applies during employment therefore no employment income tax should be payable. If a loan made from the trust to the employee remains outstanding at the date of the employee's death, it will be treated as a debt on the employee's estate for inheritance tax purposes, thus reducing the value of that estate.
  • If the employee is given the use of trust assets in a form constituting a benefit in kind, an annual income tax charge on the calculated value of the specific benefit will arise. However, once that employment has ended, the provision of a benefit in kind (in the year following termination and subsequent years) will not give rise to any employment income tax charge.
  • If the employee is given a loan or is allowed to use assets, there may only be a small NIc liability for the employer (currently about 0.61% per year).
  • Many employers recognise an EBT as also being an effective employee retention tool. One example is that the provision of benefits could be contingent on continued employment for a specified period.
  • An EBT can in certain circumstances provide relevant benefits that are described in the section entitled EFRBS.

EFRBS (Employer Financed Retirement Benefit Scheme)

An EFRBS is a flexible alternative to a UK registered pension scheme (RPS). The main benefits are broad investment choices and that the annual and lifetime allowances, which apply to RPS and limit the amount of tax relief which can be achieved on pension provision, do not apply to EFRBS.

Key Features

  • An EFRBS offers employers an opportunity to reward key personnel, including business owners, through potentially unlimited provision for retirement benefits. Both companies and unincorporated businesses can, in most cases, provide the benefits of an EFRBS.
  • For the non-UK domiciled employee, an EFRBS can be structured as a direct replacement for an International Pension Plan but without the need for an overseas employer.
  • For a UK-domiciled employee, an EFRBS can be structured to provide an investment fund that grows in a tax-advantaged environment and which remains outside the individual's inheritance tax estate.
  • In some circumstances, a UK corporation tax deduction is available for the funding of an EFRBS. Generally though, a UK corporation tax deduction will be claimed on a deferred basis until benefits are provided. An EFRBS can assist with the long-term retention of valued employees.
  • Funding of an EFRBS is not subject to the annual allowance restrictions which apply to registered pension schemes in the UK, nor do the lifetime allowance restrictions apply to the total fund including growth.
  • Funding of an EFRBS should not be taxable as employment income of employees, nor subject to National Insurance contribution (NIc).
  • Rewards received through an EFRBS may be provided without liability to employer's or employee's NIc.
  • There is no mandatory requirement to purchase an annuity when taking benefits.
  • There is a greater flexibility of investment choice – mutual funds, hedge funds, stocks and shares, residential property and/or chattels, etc.
  • Investment growth is tax-advantaged – non-UK income and gains roll up free of UK and Jersey tax within an EFRBS established in Jersey (UK sourced income is charged at 40% or 32.5% for UK dividends, 50% or 42.5% from 2010).
  • Taxation of pensions and annuities will depend upon the scheme member's tax residence at the time benefits are taken.
  • Taxation of lump sums will also depend upon the member's tax residence at the time benefits are taken (but if a lump sum is taxable in the UK it will be subject to reduction for overseas service).

To discuss further please contact us

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