K&H is now offering a remuneration review for company owners to identify the most tax-efficient combination of options to extract funds from the company and save as much tax as possible. EBTs are a great way of doing this. But what are they?
EBT stands for Employee Benefit Trust. An Employee Benefit Trust is a Discretionary Trust set up by an employer to provide benefits to past, present and future employees and their dependants.
An EBT can provide many benefits.
Typically, EBTs have provided loans to business owners and key team members, enabling them to extract cash from the business in a tax-efficient way.
Where interest-free loans in excess of £5,000 are provided from the EBT, a benefit in kind would arise.
This is currently equal to 1.9% tax per annum for a higher-rate taxpayer. There is no tax charge on the loan recipient if the loan is interest-bearing.
There are also potential Inheritance Tax savings as the loan creates no debt on the estate of the borrower.
When the company contributes to the EBT, it may even be possible to obtain a Corporation Tax deduction for the company contribution into the EBT, again depending on the circumstances.
The trust can be set up onshore or offshore, depending on particular requirements and how the funds are to be applied.
The location of the trust is not relevant to the immediate tax benefits of any planning, but can have a significant bearing in the long term. The key difference will be the ongoing income tax and capital gains tax position of the trust.
If the trust is resident in the UK, any income and gains will be taxable as they arise in the hands of the trustees, whereas a non-resident trust may only be taxable in the UK if there is a UK source.
If the funds are likely to be invested for a significant period, then an offshore trust may allow funds to roll up in a low tax environment.