Employee Benefit Planning Structures and FBTs

Employee Benefit Planning Structures and FBTs

During the past decade, there has been an increased use by employers of equity-linked and other incentive plans to attract and retain key people. Many of these plans are quite complex and, to avoid the risk of the benefits being taxed twice, both in the hands of the employee and in the hands of the employer, they are often organised through a tax-neutral centre such as Jersey.

An important and growing element of our business is related to the establishment and administration of such employee benefit structures that are designed to provide tax-neutral benefit planning for individuals who are employed by corporations and other organisations.

One scheme being used by numerous clients at Volaw is known as a Family Benefit Trust (“FBT”).

A FBT is a form of discretionary Employee Benefit Trust (“EBT”) used as a mechanism for providing benefits to employees and their families over the long term in a tax-efficient manner.

There are two main differences between a FBT and an EBT structure:

  1. The beneficiary class in an FBT is significantly wider, reflecting the long-term nature of the structure. The beneficiaries may include not only the employees of the company or group but also their relatives and dependants (e.g. spouses, siblings, children, parents, grandparents, etc.)
  2. The trustee allocates assets into separate sub-funds to be held for the benefit of particular employees and their families. The assets within each sub-fund are held at the discretion of the trustees and may be used for a variety of purposes such as making investments, or to provide benefits such as interest free or beneficial loans, purchasing a holiday home, and so on.

FBTs enable tax efficient incentives to be given to employees in a flexible and targeted manner provided that the FBT is used as a long-term deferral mechanism.

The FBT offers several advantages to the employee:

  • Contributions – There will be no income tax or social security / national insurance on contributions into the FBT or on allocation of the assets into sub-funds;
  • Capital Gains – There is no UK tax on any capital gains or foreign source income in relation to investments made by the trustee. The trustee will be subject to tax on UK source income at 40% (dividends will be subject to tax at 32.5%);
  • Benefits In Kind – With careful structuring it is possible for benefits in kind to be provided to the employees or their family during his/her employment at low effective rates of tax (for example interest free loans are currently subject to tax at an effective rate of 2.5% per annum). Under current legislation any benefits in kind provided in the tax year following the tax year in which the executive’s employment terminates are tax free;
  • On Death – Any assets held within the sub-fund at the date of the employee’s death can be passed to his family free from inheritance tax and income tax (subject to some anti-avoidance rules).

However, any distributions from the FBT during the employee’s life-time are subject to income tax and (employee and employer) social security / national insurance.

A FBT can be used by the employer as a valuable retention tool. From a tax perspective there is employer social security / national insurance deferral but there is no corporation tax deduction on making contributions into the FBT. For this reason, employers will often reduce the amount of the contribution into the FBT to keep the employer in the same net position as if it had paid a cash bonus to the employee.