Checklist for establishing an EBTFORTHCOMING CHANGE: On 11 March 2024, HM Treasury launched a consultation on the effectiveness of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017, SI 2017/692, which place requirements onto a range of businesses to identify and prevent money laundering and terrorist financing. The consultation includes reforming registration requirements for the Trust Registration Service (TRS)—with a possible de minimis exemption from registration on the TRS if certain tests are met. Responses to the consultation were sought by 9 June 2024 and the government’s response is awaited. See Open consultation: Improving the effectiveness of the Money Laundering Regulations and Share Incentives weekly highlights—14 March 2024—Employee Benefit Trusts.This is a checklist of the main items that must be considered before setting up an employee benefit trust (EBT) and immediately following the establishment of the EBT. It assumes that the company has already made the decision to set up the EBT, having taken appropriate advice on this. For further details on EBTs more generally, see Practice Note: What is an employee benefit trust? and for a more detailed examination of the main steps and potential issues involved with establishing an EBT, see Practice Note: Setting up an employee benefit trust. For a copy of an EBT trust deed, see Precedent: Employee Benefit Trust Deed.Confirmed?1. Timing1A: Confirmation that a decision has been made that the EBT should be established now. The alternative may be that the EBT could be set up at a later date, eg closer to vesting or exercise of share awards. For issues associated with this, see Precedent: EBT Operating Agreement.□1B: Confirmation that a decision has been made regarding whether the trustee of the EBT should subscribe for shares in the company or acquire shares from an existing shareholder. For further information on this, see Practice Note: Sourcing shares for share schemes—comparing new issue shares, market purchase shares and treasury shares.□2. Settlor2A: Confirmation as to which company will establish the EBT and execute the trust deed. Normally this is the group's parent company but sometimes (normally because the parent company is not resident in the UK) it is another group company. See Practice Note: Setting up an employee benefit trust.□2B: If a subsidiary company will settle the EBT, confirmation that the group employees who are intended to benefit under the EBT will fall into the class of beneficiaries. Employees of companies above the settlor company will not generally benefit. See definition of an ‘employees’ share scheme’ in Practice Note: What is an employee benefit trust?□2C: Confirmation of whether anyone else will be contributing to the EBT, whether in cash or assets.□2D: If someone other than the main settlor company is contributing to the trust assets, have they obtained independent tax advice about being a settlor? For potential tax consequences, see Practice Note: Setting up an employee benefit trust.□3. Trustee□3A: Confirmation that the trustee has been determined and agreed by the company. If the intention is to use a professional trustee and one has not been selected, companies should normally send out requests for proposals to at least two different potential trustees and compare them. See Practice Note: Setting up an employee benefit trust.□3B: Confirmation that, if the trustee is a professional trust company, their terms of appointment are agreed and executed by the company.□3C: Confirmation on the residence of the trustee of the EBT. If the trustee is resident outside of the UK, normally this has the effect that the EBT will also be treated as non-UK resident from a tax perspective. For the implications of this, see Practice Note: Employee benefit trusts—onshore and offshore trusts and tax implications.□4. Approvals obtained□4A: Confirmation on whether shareholder approval has been obtained. This will be required if:• the company is listed and subject to the continuing obligations of UKLR 9.3 of the UK Listing Rules• the company has institutional shareholders or is otherwise seeking to comply with corporate governance best practice requirements and more than 5% or more of the company’s issued ordinary share capital may be held in the EBT at any one time. See Practice Note: Employee benefit trusts—Investment Association Principles of Remuneration• there are shareholder approval requirements under the articles of association, or applicable shareholder or investor agreements and loan agreements, and/or• it is necessary to amend or disapply any existing pre-emption rights under the articles of association which restrict the issue or transfer of shares to or from the EBTSee Practice Note: Setting up an employee benefit trust.□4B: If shareholder approval required, confirmation that approval has been given.□4C: Confirmation on whether the board has approved the establishment of the EBT and the execution of the various documents to be signed, including the trustees’ terms of business. See Precedent: Board minutes establishing EBT for example wording of board approvals.□5. Trust deed□5A: Confirmation that the trust deed is appropriate and that it is to be entered into by the correct parties. For an example trust deed, see Precedent: Employee benefit trust deed.□5B: Confirmation that the trust deed contains a provision that if the trust deed permits any of the trust property to be applied for participators of the company and their connected persons while the relevant company is a close company, that such monies would only be paid out if the provisions of section 13(4) of the Inheritance Tax Act 1984 (IHTA 1984) are complied with. See Practice Note: Employee benefit trusts and inheritance tax considerations.□5C: Confirmation whether the trust deed contains a limitation on the percentage of shares that can be held if required, eg in order for the company to comply with institutional shareholder recommendations, such as the Investment Association Principles of Remuneration. See Practice Note: Employee benefit trusts—Investment Association Principles of Remuneration.□5D: Confirmation that the class of beneficiaries is wide enough and constitutes both (1) an employees' share scheme under section 1166 of the Companies Act 2006 (CA 2006) if this is required, and (2) a trust for the benefit of employees under IHTA, s 86 if this is required. See Practice Notes: What is an employee benefit trust?, Employee benefit trusts and inheritance tax considerations and The Companies Act definition of employees' share scheme and its implications.□5E: Confirmation that the powers of the trustee are sufficient in order for it to administer the trust as intended, eg to enter into and administer a joint ownership agreement. See Precedent: Employee benefit trust deed.□5F: Confirmation that the trust deed contains the correct provisions dealing with whether dividends should be waived or not. If there is a preference for the trustees to waive their entitlement to dividends on dividend yielding shares, this should be reflected in the trust deed, as otherwise the trustees may have a difficulty under trust law to waive their rights later. See Precedent: Employee benefit trust deed.□5G: Confirmation that the trust deed has been agreed by all parties and signed off by appropriate counsel.□6. Operating terms6A: Confirmation as to whether the relevant company and trustee will enter into an operating agreement to cover practical issues such as which awards the trustee will be asked to satisfy and funding obligations. See Precedent: EBT Operating Agreement.□6B: Confirmation that the trustee of the EBT is not going to be asked to satisfy awards that are already a company liability (ie that already have been granted without reference to the EBT). For issues associated with this, see Precedent: EBT Operating Agreement.□6C: Confirmation that the operating agreement (if any) has been agreed by all parties and signed off by appropriate counsel.□6D: Confirmation that appropriate letters of wishes have been prepared and agreed by all parties.□7. Funding□7A: Confirmation that the initial contribution establishing the trust fund has been agreed and steps are in place for such amount to be transferred from the settlor company to the trustee of the EBT. See Practice Note: Setting up an employee benefit trust.□7B: Confirmation that the trustee will not be requested to purchase shares or otherwise incur a liability that it could not satisfy.□7C: Confirmation of any further contributions (voluntary contributions or loan contributions) for the initial purposes of the EBT and that steps are in place for such amount to be transferred from the relevant group company to the trustee of the EBT.□7D: Confirmation that an appropriate loan agreement (if relevant) has been agreed and signed off by appropriate counsel. See Precedent: EBT loan agreement.□7E: Confirmation that an appropriate contribution agreement (if relevant) has been agreed and signed off by appropriate counsel.□7F: Confirmation that where a group company is to make a loan to the trustee of the EBT and that company is a close company, consideration has been given to the tax provisions in section 455 of the Corporation Tax Act 2010 which may require payment of an effective corporation tax charge with HMRC. See Practice Note: Funding an employee benefit trust.7G: Confirmation that where the funding company is a close company, that consideration has been given to the inheritance tax implications of a close company funding the trustee of an EBT. See Practice Note: Funding an employee benefit trust.□7H: Where the company that is funding the EBT is a public company for the purpose of the trustee of the EBT to acquire its shares (or those of its private parent) or is a private company funding the EBT to acquire shares in its public company parent, has there been appropriate company law sign off that such funding does not constitute unlawful financial assistance. See Practice Note: Funding an employee benefit trust—financial assistance.□7I: Confirmation that the company and trustee has been advised on the implications of Part 7A of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003). See Practice Note: Employee benefit trusts—UK taxation issues□7J: Confirmation that in relation to awards which are not to be immediately satisfied, either the trustee is not aware of the identity of the potential beneficiary or one of the exemptions in ITEPA 2003, Pt 7A applies. See Practice Note: Employee benefit trusts—UK taxation issues□8. Disclosure8A: If the settlor is a quoted company, confirmation that applicable disclosure obligations in the Companies Act and UK Listing Rules and the Market Abuse Regulation, where applicable, have been complied with. See Practice Notes: UK Listing Rules—employee share schemes aspects and Share incentives aspects of MAR and related guidance.□8B: Confirmation that if the EBT is not resident in the UK and the settlor is a ‘long-term UK resident’ (which in respect of a corporate settlor will be the case if the company is incorporated in the UK or was within the charge to UK corporation tax on its income at any time during the previous tax year), then preparations are in place for notifying HMRC within 3 months of the establishment of the EBT. See Practice Note: Setting up an employee benefit trust and Precedent: Section 218 IHTA 1984 notice.□8C: Confirmation on whether it will be necessary to register the EBT in accordance with the requirements of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017, SI 2017/692 using the HMRC Online Trust Registration service within applicable deadlines. See Q&A: Does an employee benefit trust have to be registered with HMRC’s online Trust Registration Service and what deadlines apply for any such registration? and Practice Notes: Money Laundering Regulations 2017—impact on trustees and Trust Registration Service (TRS) (TRS).□