EBTs: A Tool in Need of Reinvention

Rebooting the Trust: Rethinking the Role of Employee Benefit Trusts for a Mobile Workforce

Employee Benefit Trusts (EBTs) have long occupied an ambiguous space in the incentive landscape. Originally conceived as a mechanism for delivering employee benefits and facilitating share plans, EBTs were, for a time, at the centre of aggressive remuneration planning - often involving loans or complex deferral arrangements. That era was more or less ended by the introduction of Part 7A of ITEPA 2003 (disguised remuneration), which targeted third-party employment income and effectively shut down the most egregious tax-advantaged EBT schemes.

Since then, EBTs have drifted into complacency - no longer misused, but not truly useful either. At the PLC level, many now serve as little more than static repositories, warehousing shares for vested options, legacy awards, or future allocations. Underutilised, misunderstood, or simply forgotten.

But what if we re-imagined them? What if, instead of being passive vehicles, EBTs became dynamic, flexible wealth engines, designed to align with how younger, more mobile workforces engage with equity and benefits today?

Rethinking the Purpose of an EBT

At their core, EBTs are discretionary trusts and that’s where their real power lies. Discretion allows flexibility, and flexibility is exactly what’s needed in a world where employees no longer build value in one job or one scheme, but instead accumulate economic interests across multiple roles and employers over time.

So here’s a provocative idea: what if an EBT could function like a personalised ISA or SIPP — but with employer shares?

The Pooled Partnership Concept - A Portfolio of PLC Equity

Rather than leaving shares sitting idly in an EBT, individual beneficiaries - say, former employees who have vested awards but no longer wish to hold direct shares - could exchange those shares for a partnership interest in a pooled investment vehicle.

This pooled vehicle would be managed professionally, structured as a partnership or investment trust, and include equity contributed by EBTs across multiple PLCs. Each EBT contributes surplus or held-back shares into a central vehicle that holds a diversified basket of listed UK company equity.

Participants receive units in the pooled vehicle, representing a proportionate interest in the underlying basket of shares. The value of their holding is no longer tied to a single employer’s performance, but to a professionally managed, diversified portfolio - more akin to a long-term savings product than a lapsed share plan.

Diversifying Employee Wealth: The Pooled EBT Model

In today's dynamic workforce, employees at large PLCs often receive a significant portion of their compensation in the form of company stock. While this aligns incentives and motivates employees to contribute to their company's success, it also introduces substantial undiversified risk. A large portion of an employee's financial net worth and human capital can be tied up in one company, creating vulnerability if the company faces a downturn.

Concentration Risk and Tax

The traditional approach to mitigating concentration risk involves selling company shares and buying something more diversified, like an index fund. However, this can trigger significant capital gains taxes and may not be feasible due to vesting periods and restrictions. Contributing shares to a pooled EBT in exchange for units in a diversified portfolio could be structured to defer taxes or be tax neutral overall, allowing employees to diversify their holdings without the immediate tax burden associated with selling shares.

Professional Management and Scalability

Managing a diversified portfolio individually can be complex and requires technical tax structuring. The pooled EBT model simplifies this process by involving professional management, ensuring efficient and effective oversight of the investment. This approach is scalable, making it accessible to a broader range of employees, not just the super-rich.

Alignment of Incentives

While companies use share plans to align employee incentives with company performance, this can lead to excessive concentration risk. The pooled EBT model addresses this by allowing employees to benefit from stock-based incentives while mitigating the risks of holding a concentrated position in their employer's stock. Employees can still be motivated by their company's success, but with the added security of a diversified portfolio.

Impact on Competition

A diversified portfolio among employees might reduce the competitive drive if all employees hold shares in multiple competing companies. However, the primary focus of the pooled EBT model is on reducing individual financial risk and providing long-term wealth-building opportunities. This approach ensures that employees are not overly dependent on the performance of a single company, fostering a more stable and resilient financial future.

The Diversification Advantage

It will be apparent that the most obvious and powerful benefit of the pooled EBT model is diversification. One of the core criticisms of traditional share plans is concentration risk - employees having too much of their wealth tied to one company. This model spreads that exposure and introduces resilience.

From a governance perspective, this reduces risk for employers and trustees. For employees, it transforms share plan participation from a one-bet gamble into a serious, long-term wealth tool.

Why Would a PLC Bother?

It’s a fair question. Why would a listed company go to the effort of contributing shares to a pooled vehicle that also benefits ex-employees - and potentially ex-employees of other companies?

Here’s why:

A Useful Analogy: Pooled EBTs and Pension Master Trusts

If pensions can pool, why not employee share plans via EBTs?

Structuring and Regulatory Considerations

To make this work, we’ll need to cross a few tax, technical and regulatory bridges:

• PLC dogma: navigating dealing codes, remuneration policies and disclosure
• Tax treatment: ensuring the share-to-unit exchange is tax-deferred or tax-neutral
• Trust governance: maintaining discretionary status
• FSMA and Collective Investment Schemes: avoiding FCA authorisation by ensuring the structure is not a promotion or CIS under FSMA 2000
• Avoiding crossover into savings and pension regulation: e.g. ISA / SIPP rules

These aren’t easy hurdles - but they’re navigable. The savings and pensions industry has been here before and is always reinventing itself. Why not EBTs and the share plan world?

Conclusion: Reboot the Trust

The lawyers and technical advisers reading this will, of course, have a field day. There are no shortage of juicy technical issues to get stuck into or object to….our specialty. From the tax treatment of exchanges, to financial regulation, to discretionary trust mechanics and PLC governance, there is much to critique here, lots of potential flaws to dine out on.

I’m not pretending any of this is simple, or even straightforward.

But if the alternative is continued passivity, a future where PLC EBTs simply sit idle, adding little value, then surely this kind of rethink is not just worth exploring but overdue.

And the parallels with pensions are hard to ignore. In both cases, the challenge is the same: legacy vehicles struggling to adapt to the modern world, with a solution that is remarkably similar: scale, professional oversight, and shared infrastructure.

EBTs aren’t broken. They’ve just been underused. And with the right design and ambition, they might just help shape the future of flexible, long-term employee wealth.

For those who want to dig into the practical challenges - from tax to FSMA to trust law - I’ve put together a short FAQ addressing the main objections and responses. Just email me to ask.