Employee Benefit Trusts

Do you have an existing Employee Benefit Trust? If so, what are your options in view of the draft legislation announced on 9th December 2010?

We have put together some FAQs....

Frequently Asked Questions

Q. What does the new draft legislation seek to do?

A. The new legislation introduces an income tax charge on the employee (with PAYE) when a relevent event takes place. The legislation is wide-ranging and complex, but it targets situations where a a company uses a third party such as a trust to provide benefits to employees. Whilst clearly targeted at trusts such as EBTs and EFRBS, it is important to stress that the third party could be any entity and would include Companies and LLPs etc.

Q. I have an EBT or EFRBS already and would like to take a new loan from it. Am I effected?

A. Yes, the main target of the legislation appears to be the provision of loans to employees. In such circumstances the amount of the loan is treated as employment income chargeable to PAYE. So a loan of £1m from an EBT would be treated as taxable income of £1m.

Any tax due under these provisions is payable under PAYE by the employer. The employee then has to make good the PAYE to the employer. If he or she doesn't make good, there will be a further "grossed up" tax charge on the employee.

The exception to this rule is if the loan is repaid before 5 April 2012, in which case there is no PAYE tax to pay. Note that if the loan is repaid after 5 April 2012, there is currently no mechanism to reclaim the PAYE tax paid!

Q. What if I have already taken a loan before 9th December 2010? Am I effected?

A. As long as there are no variations to the terms of the loan, then this loan should not be covered by the new legislation. But if you need to make changes to an existing loan, you should seek professional advice as soon as possible.

Q. Are there other changes that I need to be aware of?

A. The legislation also applies to transfers of assets by a third party to an employee or where funds are allocated (formally or informally) to an individual or their family. These rules in particular are very widely drawn and could lead to a great deal of uncertainty in practice. For example, this could be interpreted as including the situation where an employee suggests to the Trustees that they should purchase a particular asset. We don't believe this is intended, particularly when you consider that this applies to EFRBS, a type of pension scheme. Hopefully, this point will be clarified before the new legislation is finalised as part of the consultation process.

Q. What should I do if this issue effects me?

A. If possible, we would recommend you do not take any funds from your EBT, at least until the consultation period for the legislation has ended.

It may also be the case that someone comes up with an idea that may be of interest to you. In which case, we will get to hear about it and will be able to judge whether we think it is a bad idea. If you would like us to get in touch with you at this time, please contact us now and we will arrange to keep you up to date on any relevant developments as and when they happen.