Employee trust

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An employee trust is a trust for the benefit of employees.

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The employees that an employee trust benefits are usually defined by reference to employment by a particular company (or group of companies).  In addition to employees, the beneficiaries may, under the terms of the trust, include some or all of former employees (of the relevant company or group) and individuals defined by reference to their marriage to, civil partnership with or dependence on such an employee (or former employee). [1] Charities may also be included in the class of beneficiaries.

An employee trust is typically established by the relevant employing company (or a company in the employing group) entering into a trust deed (or other trust instrument) which sets out the terms of the trust, including who is to act as its trustee. An employee trust could also be established by an individual, for example a shareholder in the relevant company, including by their Will. [2]

The choice of who is the trustee of the trust and the type of property subject to the trust will vary depending on the purpose of the employee trust.

Many employee trusts are discretionary trusts, where the trustee has discretion to select which beneficiaries benefit, when and how.  It is possible that beneficiaries have fixed or absolute interests, for example, where shares awarded to employees under an employee share ownership plan remain held in an employee trust. [3]

Government policy and tax rules in the United Kingdom, the United States and elsewhere encourage the use of employee trusts to support employee share ownership or employee ownership. [4] [5] Although, Government policy and tax rules may also counteract certain uses of employee trusts, for example, when they are used avoid the payment of tax on remuneration. [6]

Purposes

Employee trusts exist for many purposes and have a wide range of titles.

If the terms of the trust meet requirements prescribed by tax or other regulations, then the employee trust is likely to be known by the name given in the relevant regulations, for example, a share incentive plan or an employee stock ownership plan. If the purpose of an employee trust is to provide pensions or other retirement related benefits it is likely to be referred to as a pension plan or retirement benefits scheme, rather than an employee trust.

The term employee trust (or, in the UK, employee benefit trust) is most likely to be used to describe a trust, where the trustee has wide-ranging powers, to be used at its discretion. Such a general employee trust may, nevertheless, in practice be intended to achieve a particular purpose and be named accordingly. [7] For example:

Influence of tax rules

The extent to which particular types of employee trust are used in a country at any time can be significantly influenced by prevailing tax rules or other regulations, especially in relation to taxing the direct or indirect payment of remuneration, including policies on what is considered unacceptable tax avoidance. [10]

Counteracting schemes to avoid tax on remuneration

In the UK the use of employee benefit trusts to provide loans to employees (or anything that is a reward or recognition, in connection with an employee's employment) was, in particular, curtailed by anti-avoidance legislation introduced with effect from 9 December 2010. [11] This legislation imposed an immediate charge to income tax on the full value of such loans (or other benefits) provided from that date. [12]  These new tax rules are referred to as the disguised remuneration rules.

Between 2001 and 2009, the Glasgow-based football club Rangers F.C. used employee benefit trusts based in Jersey to avoid large amounts of income tax, inheritance tax and National Insurance by providing unsecured loans to employees that the employer had no intention of getting repaid while the employee lived. The Supreme Court ruled in 2017 that although the (indefinitely extended) loans were valid, the money paid into the trust by Rangers for an employee's benefit was income subject to income tax and national insurance deductions in the same manner as if it was paid directly to the employee. [13] [14] The resulting tax liability of the liquidated Rangers F.C. plc was not settled until 2022. [15]

Encouraging employee share ownership and employee ownership

The UK Government supports the use of employee benefit trusts as part of genuine arrangements to create employee share ownership or employee ownership. [16]   It has over the years provided tax advantages for specific types of employee trust, including:

Current arrangements supported by the UK Government to promote employee share ownership and employee ownership using trusts with special tax advantages include:

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<span class="mw-page-title-main">Massachusetts business trust</span>

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Sharesave, also known as Save As You Earn, SAYE, or the Savings Related Share Option Scheme, is a British savings scheme designed to encourage employees to buy stakes in the companies for which they work. It was introduced by the British government in 1980, with HM Revenue & Customs approval, according to a model set by the Treasury. From 6 April 2014, HMRC approval will no longer be required for a SAYE plan to obtain tax benefits, instead an employer is required to self-certify that the SAYE meets the requirements of the relevant legislation. Accordingly, from 6 April 2014, a SAYE plan should no longer be referred to as an HMRC approved plan.

<span class="mw-page-title-main">Taxation in South Africa</span>

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An Employee Stock Ownership Plan (ESOP) in the United States is a defined contribution plan, a form of retirement plan as defined by 4975(e)(7)of IRS codes, which became a qualified retirement plan in 1974. It is one of the methods of employee participation in corporate ownership.

Employee share schemes are part of the remuneration packages offered to some employees in the United Kingdom.

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References

  1. ↑ See, for example, the UK definition of a trust for the benefit of employees in section 86 Inheritance Tax Act 1984 or the definition of an "employees' share scheme" in section 1166 Companies Act 2006.
  2. ↑ Nelson-Jones, John; Nuttall, Graeme (2007). Employee ownership – Legal and Tax Aspects. Fourmat Publishing. Chapter 6. ISBN   978-1-85190-033-6.
  3. ↑ For example, shares kept in a UK share incentive plan trust by a participant until sold have a special capital gains tax advantage. HM Revenue & Customs Employee Tax Advantaged Share Scheme User Manual ETASSUM29050
  4. ↑ Department for Business, Innovation & Skills (30 October 2012). "Employee ownership, next steps: government response". GOV.UK. Retrieved 3 May 2020.{{cite web}}: |last= has generic name (help)
  5. ↑ "The Main Street Employee Ownership Act" (PDF). Rutgers. Retrieved 3 May 2020.
  6. ↑ "Employee benefit arrangements of concern". Australian Tax Office. 21 May 2019. Retrieved 3 May 2019.
  7. ↑ HM Revenue & Customs Trusts, Settlements and Estates Manual TSEM5025
  8. ↑ "Consultation outcome on new employee shareholding vehicle". GOV.UK. 10 December 2014. Retrieved 3 May 2020.
  9. ↑ "Employee Ownership Trust". ESOP Centre. 29 April 2016. Retrieved 3 May 2020.
  10. ↑ "Overview on use of employee benefit trusts". Croner-i Direct Tax Reporter. 3 May 2020. Retrieved 3 May 2020.
  11. ↑ Martindale, Nick (13 November 2013). "How to use offshore employee benefit trusts". Employee Benefits. Retrieved 3 May 2020.
  12. ↑ HM Revenue & Customs Employment Income manual EIM4500
  13. ↑ Her Majesty's Revenue and Customs (29 September 2017). "Disguised remuneration: a Supreme Court decision (Spotlight 41)". GOV.UK. Government Digital Service. Retrieved 19 June 2024.
  14. ↑ RFC 2012 plc (in liquidation) (formerly The Rangers Football Club plc) v Advocate General for Scotland [2017] UKSC 45 (5 July 2017), Supreme Court (UK)
  15. ↑ Cassidy, Rory; Fleming, Keiran (8 December 2022). "Rangers' 'Big Tax' case closed after £56million settlement agreed". Glasgow Live. Reach plc . Retrieved 19 June 2024.
  16. ↑ HM Treasury. "Autumn Statement 2012" (PDF). Paragraph 1.128.{{cite journal}}: Cite journal requires |journal= (help)
  17. ↑ Nuttall, Graeme (November 2004). "Introduction to employee benefit trusts" (PDF). Stash Magazine.
  18. ↑ HM Revenue & Customs (27 June 2019). "Employee share scheme statistics – supporting documentation" (PDF).{{cite journal}}: Cite journal requires |journal= (help)
  19. ↑ Palmer, Neil (20 June 2019). "Employee ownership: A panacea or passing fad?". Fieldfisher. Retrieved 3 May 2020.
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