My client wants to use an employee benefits trust (EBT) to provide group risk protection benefits. Is this an appropriate vehicle?
EBTs are a recognised mechanism for providing deferred remuneration and benefits to employees including share schemes. They offer tax advantages such as a deduction on employer contributions and no National Insurance (NI) contributions, minimisation of income tax and capital gains tax and limitation of inheritance tax. Advocates believe staff will avoid a P11d charge for unapproved benefits.
But, some experts are wary of EBT arrangements as the advantages claimed can lead to some serious risks, including tax payable on the emerging benefits. The main tax advantage appears under threat following a recent Accounting Standards Board publication. This suggests any assets and liabilities under EBTs should be included in the company accounts and the employer will only get a tax deduction when a liability occurs, for example if an employee dies.
Consider the effect on the following group products in turn.
Approved group life schemes: These require a special trust acceptable to the Pension Schemes Office.
Group IP schemes: When written as part of an EBT these would no longer be classed as occupational sick pay arrangements. There is a possibility staff would lose State benefits and be disqualified from continued participation in the pension scheme or group life cover.
Unapproved group life and group critical illness schemes: If an EBT is used, this could result in tax and NI contributions levied on the emerging benefits.
There appears to be no good reason to use EBTs as a vehicle to hold conventional group business. This is because the normal insured arrangements already attract tax relief for the employers. Those wishing to consider EBTs should seek specialist advice as there are various complications to consider.
Nicola Smith
