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EBTs: How to pay yourself and pay no tax

EBT stands for Employee Benefit Trust. It is a trust set up by a company for the benefit of its employees.

The trust needs to be formed by an expert and this advice is not cheap. A company needs to be making profits of at least £150,000 to make the net tax savings worthwhile.

A profitable business could reward the business owners and key members of staff by making payments to an EBT for their benefit. The owner and key staff become potential beneficiaries of the trust. They can request loans from the trustees. The loans can be interest-free, giving rise to a small tax charge of roughly 2% per year on the borrower, or they can be interest-bearing, currently at a rate of 4.75%, which avoids the tax charge.

In other words, a business owner could replace a tax charge of 50% on funds extracted from his business with a bill of 2% for each year the loan is outstanding.

In some circumstances it may be possible for the payment to reduce the amount of Corporation Tax payable by the company.

The Revenue will ask questions to make sure the planning is implemented properly. This planning is not for everyone – it is aggressive tax planning.

An alternative and less aggressive option is to use an Employer Financed Retirement Benefits Scheme (EFRBS).¬†Interest-bearing loans may be made to beneficiaries currently at a rate of 4.75%. This is a less aggressive option but the payment will not reduce a company’s Corporation Tax Bill.

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