Government proposing to reform Employee Benefit Trust rules

These proposed changes form part of a wider consultation concerning Employee Ownership Trusts and EBTs. We discuss the consultation further in our article Government launches Employee Ownership Trust and Employee Benefit Trust Consultation. The consultation ends on 25 September 2023, and if you want to provide responses please click here.

What is an Employee Benefit Trust?

An Employee Benefit Trust (“EBT”) is a type of trust that exists for the benefit of a company’s employees and, sometimes, for former employees or the relatives of employees. The EBT’s assets are typically shares in the company. The benefits that the EBT can provide to employees are wide ranging, such as pensions, sick pay, a profit-sharing arrangement, or shares. EBTs can also qualify for relief from inheritance tax (“IHT”), and it is this relief that the government are currently considering changing. 

An Employee Ownership Trust is a form of EBT. If you would like to read more about Employee Ownership Trusts please click

What are the current inheritance tax reliefs associated with EBTs?

Currently, if an EBT meets certain conditions set out in section 86, Inheritance Tax Act 1984, it will fall outside of the relevant property regime that applies to most trusts. Under the relevant property regime, trusts pay IHT at 6% at each ten-year anniversary and exit charges on capital distributions from the EBT. IHT relief is also available on transfers of shares or securities in a company into an EBT if certain criteria met, this includes both trading and investment companies. 

Why do the government think changes are necessary?

The government is concerned that sometimes EBTs are not being used as intended, specifically that they may not be used to incentivise a wider class of employees. 

The government say they have seen arrangements whereby EBTs meet the criteria for IHT relief but little, or no, capital is then distributed to the wider class of employees. Instead, such EBTs are set up so that shareholders in the company or their family members benefit from the income earned by the EBT. 

What changes are the government proposing?

The government are proposing to amend the rules concerning EBTs as follows:

1. Restrict individuals connected to the shareholders in the company from benefitting from the EBT for the lifetime of the EBT.  The government say this is in response to some cases where individuals connected to shareholders are allowed to benefit following the shareholder’s death.  Their position is that this should not be allowed.
2. An individual will only be able to obtain an IHT exemption on a transfer of shares into an EBT if they held such shares for two years prior to the transfer.
3. An EBT will only be able to benefit from favourable IHT treatment if no more than 25% of employees who can benefit from income payments under an EBT are connected to a company shareholder.

What happens next?

The government consultation ends on 25 September 2023. Following this, the government will determine the best option and develop a framework for implementation. The next stage is then drafting and implementing legislation to enact the changes.