Qualifying Employee Share Ownership Trusts (QUESTs) and Employee Benefit Trusts (EBTs)


QUESTs and EBTs are mechanisms for tax relief and share ownership.

This is an explanatory note of the main features of QUEST’s and EBT’s. QUEST’s and EBT’s can play significant roles in an employee share ownership plan.

They can:

  • Provide a mechanism for shareholders to cash in some of their equity, by selling it to employees in a tax efficient manner
  • Introduce employee share ownership into a company gradually – in order to test how it works
  • Provide a forum for educating employees regarding their role as shareholders
  • Be used as a way of borrowing money efficiently by a company
  • Act as a mini stock exchange for employee shareholders

 First principles

The establishment of an employee benefit trust is based on the tax principle that encouraging the motivation of employees is an expense of the business, which may be seen as something like employee remuneration for tax corporation tax purposes.

A trust is a mechanism by which one or more persons (the trustees) agree to hold property for purposes directed by the founder of the trust. In the case of an EBT the purpose is to put shares in the company in which the employees work and to pass them to employees. Charities are an example of a different kind of trust.

By virtue of decisions of the courts over several years where a company makes a payment to a trust for the benefit of employees (EBT) the payment can be deducted in the calculation of corporation tax. The first EBT’s were known as case law EBT’s. The Government, in introducing the QUEST, decided to invent a new name for the EBT namely an employee share ownership trust.

Since there always remains a degree of uncertainty whether the Inland Revenue will accept payments made by a company to an EBT as a tax deductible expense, the Government introduced its own form of EBT in 1989 which is known as a QUEST.


In 1989 specific corporation tax relief was made available for contributions by employers to a qualifying employee share ownership trust.

The function of the trust is to acquire and distribute shares in the employer’s company to employees. Legislation sets out certain criteria, which must be adhered to in order for the trust to be recognised as a QUEST by the Inland Revenue.

In order to be regarded as a QUEST, the trust must be established under a formal deed by the founding company. There must be at least three trustees, including at least one professional trustee (a solicitor, trust corporation, or a member of a recognised professional body). There must also be at least two non-professional trustees (usually an employee and a director or other management person), at least half of whom (the employee) have been selected by the employees of the founding company and who do not have a material interest in the company. Alternatively, which is the most common application in practice, a trust is set up with a company as a trustee. The directors of the company must follow the appointment procedure for trustees.

Monies paid to the company by the founding company must be used for particular purposes: either for purchasing shares in the founding company, repaying borrowings or interest on borrowings, making a payment to a beneficiary under the trust or meeting expenses. The ability of the QUEST to borrow money, which might be repaid out of the profits of the company, or dividends on shares is an important feature of all EBT’s.

The QUEST might borrow monies to buy shares from a shareholder who wishes to raise some capital, or to start a gradual process of reducing her/his holding in the company. It can also be used for raising new capital if the QUEST buys newly issued shares.

Where employees have been holding shares for some years the QUEST can be used to buy shares from retiring shareholders.

Monies given to the QUEST by the company must be used within nine months of receipt. Once the QUEST has purchased shares in the founding company it may hold on to them for up to 20 years before distributing them to employees.

Tax incentive for retiring shareholders using QUEST’s

There is an important tax incentives available to shareholders who sell their shares to a QUEST, and which are relevant in succession situations.

If shares are sold to a QUEST and within twelve months the QUEST acquires shares representing 10% of the ordinary share capital, then the vendor may rollover any chargeable gain if the gain is invested in other assets. This can be an attractive proposal for the retiring owner of a business whose investment in the business is through ownership of the share capital of that business.