Employer Solutions Insights: Why Create an Offshore Trust for your Employee Share Plan?

Employee share plans (or schemes) provide a method for a company to share ownership with its employees.

In this article, Matthew Carter, Associate Director – Employer Solutions, discusses the benefits of a share plan and gives his advice on putting one in place.

The benefits of a share plan

Share plans are very flexible. At one end of the spectrum they facilitate a way of rewarding one or more key senior people with equity. At the other end, they reward all of a company’s employees as part of an all-employee plan.

Below are several reasons why a company may choose to add share plans to its remuneration structure:

1. Share plans are a way of retaining staff and encouraging sound long-term decision making through deferred compensation arrangements.
2. They ensure a company remains competitive with its peers, who may also have a share plan in place.
3. They are used to attract key executives, who expect to have share based remuneration as part of their package.
4. They can be structured to incentivise key employees with performance based awards.
5. Some share plans are HMRC “approved” thereby offering tax benefits.
6. Share plans are often regarded as a way of aligning the interests of all stakeholders in a company – employees, management and shareholders.

Current UK Government statistics show that more than 15,000 companies in the UK have at least one employee share plan in place. This figure increases year-on-year, which is a strong indicator that companies see them as an integral part of their package to boost performance.

A Social Market Foundation (SMF) study in 2021 discovered that employees who owned shares in the companies they work for and who took advantage of the plans available to them, had higher levels of financial wealth than those that did not. It further found that employee share ownership was consistently linked with improved company performance and better relationships between the company and its employees.

Putting a share plan in place using a trust

Once a company has chosen that it would like to put a share plan in place, the company needs to decide how it wants to satisfy the awards it grants. It could satisfy the awards using newly issued or treasury shares, or it could choose to establish a trust to acquire and hold existing shares.

Employee Share Trusts (ESTs) are discretionary trust structures and can be used for this purpose. ESTs are established by a company to warehouse its own shares, which are used in satisfaction of awards, granted under company share plans. Some of the benefits of using an EST for this purpose are as follows:

a. Establishing a trust and funding it to purchase existing company shares means that listed companies do not need to worry about breaching new issue dilution limits. Issuing new shares above a company’s current limits would require approval by shareholders, which may not be forthcoming.

b. A trust is able to make a market for the company’s shares, for example by buying shares back from plan participants looking to sell. This is especially useful for a private company, where there is no ready market for its shares or a small listed company where liquidity may be low.

c. A professional trustee, dealing with technical issues and providing the service, will typically also be able to manage a degree of the administration of a company’s share plan, easing the burden on the company.

Where to establish the employee share trust

A further consideration is whether to establish the EST onshore or offshore. Either options have the same parties being, a settlor (the company) and a trustee who establish the trust for the beneficiaries (broadly the company’s employees). Both types of trust hold shares in the company, which are used to satisfy awards granted under the rules of the company’s share plans; as mentioned above.

An offshore trust is created with the trustee resident in a jurisdiction that is different to that of the settlor. For example, a UK incorporated and resident company may establish an EST with a Jersey incorporated and resident trustee.

Below are a few examples of the benefits of using an offshore trust, over an onshore trust:

• Offshore jurisdictions will likely be a centre of excellence for the provision of trustee services, with the required supporting services being provided locally (e.g. legal and accountancy). In addition, there will usually be specifically developed trust law, with the provision of trust services being a regulated business.
• Offshore trusts offer greater flexibility in terms of what can be provided, they are able to use a combination of assets and derivatives to enable companies to structure remuneration to meet their particular needs. For example, they can have components such as growth and phantom shares, FX derivatives, complex hedging arrangements, nominee holdings and they can facilitate discretionary distributions of cash or shares to employees.
• Offshore trusts will likely have a professional corporate trustee with specialist expertise. Having such expertise available ensures rules are followed correctly, provides access to wider trust related services, gives greater comfort and means there is an entrepreneurial driven service, covering a wide range of share plan trust designs, company types and industry sectors.
• The structure and use of an offshore trust may also deliver certain generally accepted non-aggressive tax advantages.

A clear choice

An offshore EST is regarded as one of the best vehicles for acquiring and delivering shares to employees, pursuant to the operation of a company’s share plan, due to their flexibility, professional trustee expertise and the potential tax benefits. As a first step, we would recommend a company consults with their advisors, to determine the right type of share plan to help achieve their objectives and if it would be beneficial to also establish an EST to operate in conjunction with that share plan.

The Employer Solutions team at JTC has over 25 years’ experience in the provision of trustee and administration services to ESTs, being one of the first entrants to the market in the mid-1990s. JTC as a Group has employee shared ownership at the core of its culture and has used an employee benefit trust since 1998 for all its employees. We are always available for an informal discussion, should you wish to learn more about the operation of ESTs and our trustee services.