Employee Benefit Trust

Running a successful business means keeping your best people motivated and invested. Pay rises and bonuses only go so far; real long-term alignment comes from shared success.

Employee Benefit Trusts (EBTs) offer a path forward. For companies looking to share ownership, manage equity efficiently, and reward key contributors, they offer some unique advantages.

We’ll cover everything business owners need to know about EBTs – from their basic mechanics to tax, setup, and how they stack up against other employee ownership strategies.

Our team, content and app can help you make informed decisions. However, any guidance and support should not be considered as 'legal, tax or financial advice.'

Contents

1. What is an Employee Benefit Trust?

2. Who's involved in EBTs and what they do

3. Two key problems EBTs solve

   • Managing dilution

   • Creating liquidity 

4. Other uses of EBTs

   • SIPs and EBTs

5. How do Employee Benefit Trusts work?

   • Setting up and funding the trust

   • How trustees make decisions

   • Managing ongoing compliance

6. Key benefits of EBTs

   • Benefits for businesses

   • Benefits for employees

7. Employee benefit trusts vs other models

   • EBT vs EOT

8. EBT tax treatment

   • Company tax

   • Capital gains advantage

   • The disguised remuneration trap

   • The loan charge aftermath

   • Staying compliant

   • Offshore EBT essentials

9. Use cases for employee benefit trusts

10. Managing EBTs with Vestd

What is an Employee Benefit Trust? 

An EBT is a legal structure where a trust holds company shares for your employees. Your company funds the trust, but independent trustees make the decisions about who gets what and when.

The trust works as a discretionary trust, meaning trustees have flexibility in how they distribute benefits to employees. 

While a flexible vehicle, EBTs are commonly used to support existing employee share schemes.

If you're running EMI options, CSOP plans, or unapproved option schemes, the EBT holds shares that are then distributed when employees exercise their options. This prevents you from having to issue new shares each time and keeps your cap table cleaner.

They're also used to create liquidity for departing employees. When someone leaves your company and needs to sell their shares, the EBT can purchase them using company funds.

Who's involved in EBTs (and what they do)

Every EBT involves three parties, and understanding their roles makes the whole setup much clearer:

• The company (the settlor): The company establishes the trust, funds it, and can make recommendations about share distribution. But it doesn’t control day-to-day decisions. You're essentially saying, "Here's some money and shares, please use them to benefit our employees according to these guidelines."

• Independent trustees: They have legal ownership of the trust assets and make all distribution decisions. They must act in employees' best interests, not the company's. Most companies use professional trustee firms rather than directors to avoid conflicts of interest.

• Your employees (the beneficiaries): They don't directly own trust assets until trustees transfer them. They have potential entitlements based on employment status, performance, or other criteria defined in the trust deed.

Two key problems EBTs solve

EBTs tackle some specific issues that growing companies face when they want to share equity effectively:

Managing dilution

Anytime a company issues new shares, the total number of shares increases. That means each existing shareholder owns a smaller percentage of the business, even though their number of shares hasn’t changed. The ensuing reduction in ownership percentage is called dilution.

With option schemes, dilution only becomes “real” if and when employees exercise their options. Until then, it’s uncertain – you don’t know how many people will exercise, when they’ll do it, or at what valuation. 

An EBT works differently. The company issues shares to the trust upfront, so the dilution is immediate and visible on the cap table from day one. Dilution is locked in, “concrete,” rather than hypothetical, which helps with investor conversations down the line.

The benefits include:

• Share delivery is quicker when employees exercise options because the shares already exist

• The company gains better timing control for tax planning purposes

• Less paperwork overall with fewer individual share transactions

• Cleaner cap table with the EBT appearing as a single shareholder entry

This is great from an internal company perspective, as EBTs can streamline internal admin and take the slack off finance teams. But also, it looks cleaner and more predictable to investors, as they’ll know where they stand with potential future share dilution relating to share schemes. 

Creating liquidity 

You've given people shares, but without a market, they can't do anything with them. It’s a perennial problem in the startup world. 

Direct company buybacks are an option, but can create tax complications depending on the circumstances. This leaves many waiting for an exit, such as a private sale or IPO, or a secondary sale or some other liquidity event.

EBTs help solve this conundrum by building a buyer into the company itself. The trust purchases shares from departing employees using company funds, with regular valuations ensuring fair pricing.

In practical terms, many companies run “cashless exercises” – the employee exercises options and sells the same shares back to the trust immediately, so there’s no need to find cash to cover the exercise price. 

The trust can also buy shares from leavers and later re-issue them to new joiners, recycling equity rather than constantly issuing more. 

The benefits include:

• Easy exit routes when employees need to sell their shares

• Fair pricing through regular professional valuations

• Shares stay within the employee group rather than being cancelled

• Often better tax treatment for sellers compared to other options

On the last point, where a trust – rather than the company – buys the shares, sellers will typically be within the Capital Gains Tax (CGT) regime. 

By contrast, a direct company buyback can be treated as a distribution (dividend) unless specific conditions for capital treatment are met. So the trust route often gives clearer, repeatable outcomes. Saving tax plus simplifying admin equals a big win for EBTs in the right circumstances.

Other uses of Employee Benefit Trusts

EBTs are gaining popularity for supporting option schemes, but they can also play wider roles in employee ownership. Some of the most common EBT uses are:

• Recycling equity: Shares bought back from leavers can be reallocated to new joiners, keeping the incentive pool sustainable without constant new issues.

• Dividend distribution: Where the trust holds dividend-bearing shares, trustees can pass those dividends on to employees (subject to tax rules). This can help employees feel the value of ownership even before a sale or exit.

• Supporting long-service or hardship awards: Some companies use EBTs to fund one-off benefits, such as retirement top-ups or hardship support. These must be designed carefully to avoid clashing with HMRC’s disguised remuneration rules.

• Stabilising ownership: An EBT can act as a long-term shareholder, helping preserve a stable ownership structure during times of change, for example, during fundraising rounds or management reshuffles.

EBTs are ultimately flexible vehicles. While tax and compliance rules set boundaries, trustees can adapt how they use the trust over time to ensure it aligns with company and employee objectives. 

SIPs and EBTs

Share Incentive Plans (SIPs) are another HMRC-approved scheme that always requires an EBT to function. SIPs allow companies to offer free shares, partnership shares, matching shares, and dividend shares to employees in a tax-efficient wrapper. 

While they're primarily used by listed companies rather than startups or scaleups, they demonstrate how integral EBTs are to certain share scheme structures. The trust holds shares on behalf of all participating employees and manages the tax-advantaged holding periods.

How do Employee Benefit Trusts work?

Let’s dig into some of the practical mechanics behind EBTs to illustrate how they fit into business operations.

Setting up and funding the trust

Similar to any discretionary trust, the company creates the trust by transferring a sum to trustees – often a nominal sum (e.g. £10) to establish the legal structure.

From there, there are three main ways to fund an EBT, each with different implications for cash flow and tax:

• Direct contributions involve your company gifting money to the trust, which trustees then use to purchase shares. This is clean from a tax perspective, but once you've made the contribution, that money belongs to the trust permanently.

• Interest-free loans work differently. The trust borrows money from your company without paying interest charges. This gives the trust purchasing power while keeping your options open – if there are surplus funds later, the trust can repay the loan back to your company.

• Share transfers offer a third route where founders or existing shareholders gift or sell shares directly to seed the trust. This moves shares into the trust without the company providing cash upfront, though it does mean the transferring shareholders are giving up or selling down part of their ownership.

Each of these routes can be effective, but they carry different consequences both in the short and long term. It’s highly recommended to seek professional advice before deciding how to fund an EBT in practice.

How trustees make decisions

Trustees have legal control over the trust assets and must act in employees’ best interests, not the company’s. They decide how shares are bought, held, and distributed.

You can still guide them through “letters of wishes” – recommendations about, for example, allocating shares to employees who hit targets or buying back shares from leavers. Trustees often follow these if they’re fair and consistent with the trust’s purpose, but they retain full discretion.

This shields employees from conflicts of interest while keeping decisions aligned with the business.

Managing ongoing compliance

An EBT doesn’t run itself once established. The trust acquires and distributes shares in line with the trust deed, but every transfer triggers paperwork and reporting obligations.

Compliance duties usually fall into one of these buckets:

Staying on top of compliance is not so much about red tape as it is about protecting the value of the trust. Deadlines, filings, and record-keeping may not be enthralling, but they’re what keep HMRC onside and your incentives working as intended!

Our team, content and app can help you make informed decisions. However, any guidance and support should not be considered as 'legal, tax or financial advice.'

Employee Benefit Trusts: key benefits

An EBT creates value on both the company and employee side. For companies, it’s about keeping equity tidy and incentives efficient. For employees, it’s about protection, fairness, and understanding that their shares have real-world value.

What companies gain from EBTs

From a business perspective, an EBT makes equity easier to manage and gives you more control over how ownership is handled:

• Clarity on dilution: Shares in the trust are already issued, so the impact on ownership is visible upfront. Dilution is reflected on the cap table from day one, which makes planning and investor conversations simpler.

• Tax relief: Payments into the EBT can qualify for corporation tax relief, reducing your taxable profits (subject to rules surrounding timing).

• Streamlined admin: Instead of managing dozens of individual shareholders, you deal with a single trust entity. That centralises transfers, filings, and compliance reporting.

• Sustainability of incentives: Shares can be recycled through the trust rather than issuing new ones each time, keeping schemes efficient and easier to explain to investors.

Together, these benefits make share schemes more predictable, tax-efficient, and manageable.

What employees gain from EBTs

For employees, the value lies in making ownership practical and tangible, rather than just theoretical:

• Independent oversight: Trustees are legally bound to act in the best interests of employees, protecting them against conflicts of interest.

• Liquidity options: The trust can buy back shares from leavers or sellers, meaning ownership has a clear exit route and realisable value.

• Tax efficiency: Selling to an EBT can be taxed under CGT rather than income, often slashing the bill compared to direct company buybacks.

• Dividends and rights: Once employees hold shares, they may receive dividends and other shareholder rights, depending on the class of shares they hold, and subject to the company having distributable profits from which to pay the dividends.

• Professional governance: Professional trustees bring expertise in law, tax, and fiduciary duties, giving employees confidence that the structure is being properly run.

In short, when EBTs are deployed effectively, employees gain awards that come with safeguards, liquidity, and a link to real-world value. 

This is why many companies pair EBTs with tax-advantaged share schemes like EMI and CSOP. These HMRC-approved schemes deliver the tax efficiency – avoiding income tax and NICs on grants.

The EBT then adds the practical infrastructure by warehousing unallocated shares and creating an internal marketplace where employees can realise value without triggering disguised remuneration rules. 

Employee benefit trusts vs other models

An EBT can be hugely valuable – but it isn’t always the right answer. In some cases, it might layer on complexity without sufficient upside:

• Direct share ownership: If you only have a small number of employee shareholders, issuing shares directly in their names may be perfectly manageable. 

• Share option schemes: EMI, CSOP, or unapproved options already work well for many private companies. If you’re not worried about future dilution or admin overhead, there’s no immediate need for an EBT. The schemes stand up on their own.

• Growth shares or restricted shares: These can be issued directly to employees as performance-based incentives without requiring a trust structure. 

  Growth shares only gain value when the company exceeds set valuation thresholds, while restricted shares can be made conditional on performance targets or vest over time. Both can sit directly on your cap table, avoiding the setup and ongoing admin of running a trust.

Where EBTs come into their own is when equity becomes more complex to manage, with numerous option exercises, buyout levers, or a need for liquidity. 

EBT vs EOT: what’s the difference?

Employee Ownership Trusts (EOTs) are often mentioned in the same breath as EBTs, but they’re very different. 

An EOT is a specific type of employee trust designed to encourage long-term employee ownership. Unlike EBTs, which are discretionary tools for managing share schemes and providing liquidity, an EOT is primarily a succession vehicle - designed for when founders or major shareholders want to sell the business into the hands of employees.

An EOT must hold a controlling stake (more than 50%) and benefit all employees on the same terms. John Lewis is the most well-known EOT in the UK, hence why EOTs are sometimes referred to as the “John Lewis Model”. 

Here’s how the two compare:

In summary, EBTs help you run share schemes; EOTs help you hand over the company.

Employee Benefit Trusts and tax

Tax is often the deciding factor in whether an EBT is a smart decision in practice. 

On paper, these trusts can deliver some strong advantages for both businesses and employees. However, in practice, HMRC keeps a close eye on them, and the line between a tax-efficient structure and something that looks like avoidance can be thin. 

Expand the fields below for more on tax and compliance:

Our team, content and app can help you make informed decisions. However, any guidance and support should not be considered as 'legal, tax or financial advice.'

Situations where an EBT can help

EBTs often make sense when you can visualise the kinds of strategic motives that drive companies to set them up. Here are some use cases: 

Managing EBTs with Vestd

EBTs can be powerful, but only if they’re managed properly. That’s where Vestd comes in!

Through the Vestd platform, your EBT is treated like any other shareholder. Share movements are recorded and reflected in your cap table automatically, with updates pushed through to Companies House.

All your legal documents are created and stored digitally, and you’ll get reminders when filings or submissions are due. Employees can view the value of their holdings through personal dashboards, so the link between their efforts and the company’s success is visible at all times.

If you’d like to explore whether an EBT is right for your business, or how to simplify the admin if you already have one, book a call with us.