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Share the Wealth

01 October 2019 by Tom Hicks

Share the wealth

There are key reasons for appointing an experienced EBT provider for your share plans

Share plans, commonly the responsibility of a company’s secretariat function, are a popular tool for attracting, motivating and retaining employees, whilst at the same time aligning their interests to those of shareholders and improving organisational performance.

The use of share plans, and the facilitation of employee share ownership more generally, is nothing new in the UK and the principle is actively encouraged by the UK government. Alongside the availability of tax approved plans and corporation tax deductions, the opening line of the government’s consultation outcome paper on a new employee shareholding vehicle stated “The government is committed to supporting employee ownership and encouraging its use more widely in UK business”.

Graeme Nuttall’s independent review of employee ownership for the Department for Business, Innovation and Skills in 2012, also concluded that companies with employee ownership see a number of economic benefits, including resilience during an economic downturn, faster job creation and higher levels of commitment amongst employees, which are not insignificant given the current challenges facing the UK.

Tailor Made

Whilst the general concept of adopting a mechanism whereby employees have an interest in shares in their employing company is simple, this is not a case of one-size-fits-all. It is essential for a company to identify their target audience, understand how they prioritise what they wish to achieve from their incentive arrangements, and tailor their share based reward accordingly.

The flipside of the ability to tailor share rewards is that the choices available to companies can be bewildering. It is important however, not to underestimate the advantages that are afforded to companies and their employees as a result of the initial investment in selecting the most appropriate plan(s) and ensuring their effective implementation.

For example, a private company with an eye on an exit event and with a small number of key employees or challenges around senior employee retention will be likely to adopt a plan that primarily rewards those employees for continued employment to at least the point of exit, such as a management incentive plan. In comparison, a large listed global company will need to consider local tax implications and cultures before adopting or reviewing their share plans. In this case, it may be that several plans are adopted to ensure that the benefits of the overall offering can reach as much of the employee population as possible. It may be that they adopt an all employee plan in the UK (e.g. SIP or SAYE), a global share purchase plan across the non-UK population and a long-term incentive plan for the senior employee population. Periodic review of a company’s share plan arrangements is also important to ensure that these remain fit for purpose, and compliant with regulation.

Employee Benefit Trusts

The decision making does not stop there, as there are further considerations to ensure that maximum value is achieved in the implementation of share plans. In the majority of cases, the use of a trust, specifically an employee benefit trust (EBT), can provide value to both employer and employee.
It is important to note that the use of EBTs as a mechanism for the deferral of tax and National Insurance liabilities are long gone following the introduction of ‘disguised remuneration’ in 2011 and as highlighted by the well-publicised ‘Rangers case’. Furthermore, in 2014 the UK government reviewed recommendations from the Office of Tax Simplifications in relation to a ‘New Employee Shareholding Vehicle’ as an alternative to an offshore EBT and concluded that it would not proceed, arguably providing confirmation that they consider the use of offshore EBTs to be an appropriate mechanism.

A trust itself is not a legal entity, rather a relationship between three key parties – a trustee, a settlor and beneficiaries. The principle being that a settlor provides property to the trustee to hold for the benefit of the beneficiaries. In the case of an employee benefit trust, in its simplest form, the share plan issuer takes the role of settlor, providing property, usually in the form of shares in the issuer or cash to acquire shares, to the trustee to hold for the benefit of the employees of the settlor, former employees of the settlor and certain relatives of the employees and former employees.

EBTs are incredibly flexible vehicles and the primary purpose of the trust will differ from company to company, in the same way that the share plans adopted will.

Looking back at the earlier examples, and starting with the private company, the trust would typically be used for the purpose of creating a market where liquidity might not otherwise exist, enabling acquisitions and sales of shares between the trustee and employees and former employees of the company. It is also common to see the trustee of an EBT act as nominee for employee shareholders.

This ensures that employee shareholdings can remain confidential as the trustee would be entered on the company shareholder register for all plan shares, as opposed to each individual employee. It simplifies sales and purchases between the trustee and leavers and joiners as the beneficial title to the shares changes while the legal title remains with the trustee. It also streamlines administration on a corporate action as the trustee enters into any agreements on behalf of the employee shareholder population. The trustee can also manage any unencumbered balance of shares.

When considering the previous example of a UK listed company, an offshore trust will primarily be established as part of their award hedging strategy, giving the ability to acquire shares in the market for the future satisfaction of awards, at timing that works for the company, potentially saving the company vast sums. The trustee may also be well placed to assist with the administration of the share plans and act as nominee where there are clawback or post-vest holding requirements.
In most cases the appointment of an independent professional trustee, typically located offshore, will be the logical path. Given that the trustee’s fiduciary duty is to the beneficiaries (the employees, former employees and certain relatives) the investment in the services of an independent professional trustee will add value to the share incentive proposition by minimising concerns surrounding lack of trust expertise and conflicts of interest that could otherwise exist.

The use of an offshore trustee and confirmation that the EBT is drafted to meet the requirements of section 86 of the Inheritance Tax Act 1984, should ensure that the EBT falls outside of the scope of UK capital gains tax and avails of inheritance tax advantages. It should be noted though that a share incentive plan trustee will need to be located in the UK. The trustee in this case is usually provided by the SIP administrator.

The importance of the role of the trustee should not be underestimated, the potential rewards of using an offshore trust in particular are considerable, so too are the consequences of getting it wrong. It doesn’t have to be complicated but a good trustee will build a relationship with the client and work with them to ensure that procedures are in place to avoid the many potential pitfalls. Strong relationships cost nothing and a well-managed, efficiently run EBT, utilising the services of an experienced trustee specialising in EBTs could be the best value element of a company’s incentive arrangement structuring. 

Tom Hicks is Head of Employee Incentives at Appleby Global Services

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