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Tax Planning Your Way to Wealth Through the Use of an Employee Benefit Trust

November 04, 2011 | Comments: 0 | Views: 132

What do Employee Benefit Trusts (EBT's), do and how do they work? Employee Benefit Trusts are good at achieving 2 things:

1. Avoiding Corporation Tax, making EBT's a very good corporate tax planning tool. 2. Reducing Income tax.

There are additional benefits related to EBT's which will be covered a bit later in the article.

The Employee Benefit Trust was usually situated in a tax haven like the Isle of Man, where the trust's income was not going to be taxed, which was crucial to the tax planning. The Isle of Man was usually chosen because it was close to the UK in distance and time zone and is a tax-free location for non-resident companies and non-resident beneficiaries of Isle of Man trusts.

An Employee Benefit Trust is a like its' name suggests, a trust set up for the benefit of its' employees. This money would be for such things as gifts, bonuses, staff parties etc. As already stated an EBT is a way how to reduce corporation tax and this is achieved because any cash transferred from the company account to the EBT's account is a deduction for tax purposes. Therefore if the company holds profits of £300,000 and £100,000 is transferred to the EBT, the corporation tax bill for the company will be derived from the profits of £200,000 and not £300,000. This particular transfer will reduce corporation tax by 33%.

An additional benefit to the company that had the Employee Benefit Trust is that once it had received a deduction against corporation tax, quite incredibly the company can then loan its' own cash back for company purposes. So not only did it get a deduction of corporation tax, it still got the use of the money! An additional benefit is the EBT then charges interest on the loan, which is a further deduction for corporation tax purposes. The company had its' cake and ate it too!

An Employee Benefit trust is also a way to reduce income tax. This is achieved because within the EBT, a number of sub-trusts are established for the chosen beneficiaries. The beneficiaries are usually key employees like the Directors or Shareholders. The way the EBT is able to reduce income tax is when cash is moved from the EBT's main account to the account of a given sub-trust, the beneficiaries can loan the cash back, tax-free. This is because loans are not income and are therefore not taxed. The loans are then constructed in such a way that they are never in reality paid back, but are commercial loans for tax purposes.

There is an additional benefit for the key employees who are beneficiaries of a sub-trust are that they can leave the cash in the trust and invest the cash from there in a tax-free environment. This means that shares, property and other investments can accrue and compound faster in a tax-free environment. The cash can then be loaned out as required or the beneficiary can even become a non-resident for a year and take all the cash tax-free while not being liable for UK income tax. This will also further reduce income tax and potentially capital gains tax.

Who uses Employee Benefit Benefit Trusts?

EBT's are used primarily by: 1. Limited Companies for corporate tax avoidance. 2. Contractors who want to reduce income tax.

An EBT is viable for any company with pre-tax profits of approximately 300,000 Pounds. This is because there is a cost in establishing and maintaining the trusts within the EBT and the EBT itself. The other main group of users for EBTS's are Contractors who want to avoid the effects of IR35 but in doing so reduce income tax. Contractor schemes are set up to cater to the needs of contractors and each contractor was made the beneficiary of a sub-trust.

However, since the 9th December 2010 the HMRC (UK Inland Revenue) has legislated against the Employee Benefit Trust and it is therefore no longer a legal structure for corporate tax avoidance and reducing income tax. However, as with all tax planning, when one door is closed another opens. This is the case with the Employee Benefit Trust and alternatives are already available, which achieve the same favourable outcomes for corporation tax avoidance and can reduce income tax as well. Contractors are using Umbrella companies so they can now write off their expenses against tax and be paid PAYE for the balance. The Employer Funded Retirement Benefit Scheme II (EFRBS) has been created and is now capable of achieving what an Employee Benefit Trust did.

Jason Russell is a senior consultant with The Tax Experts http://www.thetaxexperts.co.uk/, a tax consultancy specialising in UK tax avoidance schemes and tax planning. The organisation prides itself in showing clients that tax is truly optional through legal means. The company specialises in income tax planning, corporate tax planning, capital gains tax advice, inheritance tax avoidance and avoiding stamp duty on house purchases. The methods used vary but some of the more common methods are film partnership schemes, employee benefit trusts (EBT's), Employer Funded Retirement Benefit Schemes (EFRBS)and numerous other legal tax avoidance schemes.

Source: EzineArticles
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