EBTs in the wake of Glasgow Rangers – Is it a case of “They think it’s all over?”

You may have noticed that Employee Benefit Trusts (EBTs) have been in the news of late. The ‘wee’ tax case involving Glasgow Rangers and its use of EBTs to avoid tax on benefits provided to its highly paid stars has been widely publicised and, arguably, acted as the straw that broke the camel’s back in provoking the Government to introduce the new “disguised remuneration” anti-avoidance rules.  But one could be forgiven for thinking, having read all the press articles, that the use of EBTs is no longer worthwhile nor feasible.  The purpose of this article is to explain why this is not the case and how EBTs can still be used to good effect.

The background

EBTs are trusts (usually discretionary) into which employers contribute amounts to be held for the benefit of their employees and/or employees’ families.  Typically, they are situated offshore (because of certain tax advantages described later) but this does not have to be the case. The beneficiaries can include shareholders and their relatives.

Ignoring the fiscal benefits for a moment, it is worth reminding oneself that there are non-tax reasons for using an EBT:

  • they can be used to put aside sums to help out employees or their dependants when they encounter financial difficulty, particularly when death or severe injury in service occurs
  • they offer an incentive to work harder: the employee knows that a bonus structure is in place provided that they meet their targets
  • in family owned businesses the existing owners can put shares into a trust on behalf of employees without giving them the right to participate in shareholder meetings etc
  • in non-approved share schemes EBTs Provide a mechanism for recycling shares i.e. used as a vehicle to hold shares repurchased from employees or providing a market for unlisted shares.

Tax advantages

Employment taxes

Subject to what follows in relation to the new disguised remuneration rules, contributions to an EBT are not generally taxable earnings of a particular employee. Instead the employee is deemed to receive earnings (and therefore the employer is required to operate PAYE) at the time when distribution is made out of the EBT, even if this is made at a time when the individual  is no longer with the company.

The contributions do not attract immediate corporation tax relief, but relief can be claimed by the company when taxable income is paid out of the EBT. At that stage the EBT has to account for PAYE and NIC, which is typically administered through the payroll of the employer company.


From an  inheritance tax perspective an EBT set up to benefit persons of a class defined by a reference to employments will qualify for exemption from the IHT relevant property regime,  and its associated charges, provided that  most or all of the employees are capable of benefiting from the arrangement.

Exit charges can apply in certain circumstances where the EBT is modified so as to taint its qualifying status or where the trustees make a distribution to certain interested parties, for example, a person who has provided more than £1000 of the settled property, so this has to be borne in mind.

Entry charges can also apply in the case of dispositions made by close companies (in broad terms companies which are under the control of five or fewer shareholders or any number of directors); but again provided the arrangements are structured properly it may be possible to avoid such charges.

From the perspective of the shareholders, using an EBT can also provide a route for getting surplus cash (which may jeopardise the availability of Business Property Relief) out of the business.

Offshore EBT benefits

Offshore EBTs have the following additional advantages:

  • Trust gains are free of capital gains tax
  • Income tax payable by the trust is limited to UK source income
  • provided that the EBT is a genuine commercial arrangement to recruit, retain and motivate employees then distributions are generally not subject to capital gains tax

Disguised remuneration

Not content with the deferral benefits, what Glasgow Rangers et al did was to seek to extract funds in such a way to avoid the PAYE charge, for example via the use of interest free loans, creation of sub-funds and other planning arrangements.

As a result the position has now been made more complicated through the new disguised remuneration legislation and introduction of the concept of ‘earmarking’.

The new rules, which took effect from 9 December 2010, provide that if there are arrangements put in place that involve a “relevant step” i.e. earmarking or making available cash or other assets to specific employees then an immediate tax charge is imposed.

The rules are complex and require careful consideration, as quite possibly they could bite in circumstances where tax avoidance was not the main motive.

Final thoughts

The aim of this article was to dispel some of the myths surrounding EBTs and the idea that they are plain ‘bad’.

Much of the mischief came from the desire on the part of a few taxpayers to, in essence, ‘have their cake and eat it’. Unfortunately through the introduction of the disguised remuneration rules what we have is a sledgehammer to crack a nut scenario whereby complex rules make the use of EBTs seem less worthwhile. We are confident however that this constitutes a hurdle capable of being overcome and therefore EBTs remain a worthwhile option.




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