BIM44515 - Specific deductions: Employee benefit trusts: used with employee share schemes

EBTs set up in conjunction with employee share schemes are commonly called Employee Share Ownership Trusts (ESOTs) or Employee Share Ownership Plan (ESOP) trusts.

Shares in employing company or group

The shares acquired by the trust will typically be in the employing company or another company in the same group as the employing company.

ESOTs set up to hold and distribute such shares to beneficiaries are used for a variety of purposes. For example if the shares are in an unquoted company they may be used to:

• provide a market for employees’ shares that otherwise may not exist,
• maintain shareholder control and limit the possibility of unwanted take-overs which might occur if shares were sold to outside parties,
• help with business succession planning and management buy-outs.

Quoted and unquoted companies may also use ESOTs to hold such shares (existing shares bought in the market and/or newly issued shares) to transfer to employees when they exercise share options or when they become entitled to share awards under employee share schemes.

Guidance on deductions relating to employee share schemes is at BIM44000 onwards.

Shares not in employing company or group

In recent years Employee Benefit Trusts have increasingly been used to hold and distribute shares in off-the-shelf companies whose values can most easily be manipulated. The main aim of the arrangements is to secure a tax deduction for the employer’s contribution which the trustees’ use to acquire the shares, whilst minimising the amount of the share-related benefits received by key employees on which income tax and National Insurance Contributions (NICs) are payable.

Examples of arrangements aimed at manipulating share values at the time that share-related benefits become chargeable to income tax and NICs are:

• Conditional (forfeitable) share schemes - under which dividends may be paid to employees (often instead of a bonus), so shifting value out of the employees’ shares before the occasion which gives rise to income tax and NICs liability.
• Value shifting (discounted option) schemes - under which value is shifted out of shares before the employees acquire them (at which time income tax and NICs liability arises) by granting options over unissued shares in the same company. Value is then shifted back into the shares after the employees acquire them, typically by options granted to their family trusts being allowed to lapse.

For shares acquired by employees on or after 16 April 2003 the employment income tax and NICs advantages sought by using such schemes have been countered by amendments made to ITEPA03 by FA03/SCH22.

For employers’ contributions to EBTs on or after 27 November 2002, the tax advantages sought by the employer have been countered by FA03/SCH24. This broadly aligns the timing and amount of the employer’s deduction with the timing and amount on which the employee is chargeable to income tax and on which NICs liability arises.

Guidance on FA03/SCH24 is at BIM44575.