Skip to main content
Insight

Tomorrow's trust - employee trust owned companies need a trust that lasts indefinitely, not just 125 years

"On amending the rule against perpetuities and further reducing the complexity of employee ownership" (BIS). The title of this Call for Evidence reads like that of an academic treatise intended for "On amending the rule against perpetuities and further reducing the complexity of employee ownership" (BIS). The title of this Call for Evidence reads like that of an academic treatise intended for limited circulation. This is unfortunate. The employee ownership (EO) sector and others need to get beyond this title and reply to BIS by 19 February 2014. There is a crucial opportunity to ensure an English law employee benefit trust (EBT) is capable of doing what an increasing number of companies want it to do, namely exist indefinitely, not for just 125 years.  BIS needs to hear this view, or, otherwise, the idea of abolishing the rule against perpetuities for EBTs could get dropped.  Those with legal know-how can tackle the full range of questions asked by BIS; others should simply email BIS to explain why the rule against perpetuities should be abolished for EBTs.

Recommendation U of the Nuttall Review recommended abolishing the rule against perpetuities for EBTs, including for existing EBTs. We are already two years on from the launch of the Nuttall Review. The last review of the rule against perpetuities took 21 years from start to finish. After identifying the need for a review of the rule of law (in 1989), the Law Commission published a consultation paper (1993) and then a report (1998) which resulted in the Perpetuities and Accumulations Act 2009 (the 2009 Act). The 2009 Act took effect from 6 April  2010.  This time around the procedure should be much quicker. The "heavy lifting" has already been done by the Law Commission and Parliament. The 2009 Act contains a power to exclude other classes of trust from the rule against perpetuities and the idea is that this power is now used to permit EBTs to last indefinitely.

Pension schemes can last indefinitely, and so why not EBTS? This change is essential to meet the commercial objectives of those who want to implement the indirect model of employee ownership. Those that want a controlling or other significant stake in a company held in a trust indefinitely for the benefit of the employees of that company need a trust that can do this, not as under current law one that comes to an end after 125 years. The trust model of EO is due to get a significant boost in the 2014-15 tax year from new tax exemptions designed to promote EO as a succession solution (much needed by “baby-boomer” owner managers) and as a business model in its own right.

Assuming we see a plethora of new EBTs in 2014 then if the law stays as it is in, say, a 100 years time these successful trust owned companies will be faced with the difficult prospect of winding-up their EBTs within a working generation. Difficult because:

  • why should a few employees get windfall gains just because they happen to be in employment when the trust ends?

  • future employees will be deprived of the benefits that might have arisen from EO

  • there is bound to be a major adverse effect on the employing company commercially, and

  • it will be costly and complex to try to avoid these unwanted consequences.


These are all reasons used to justify exempting pension schemes from the rule against perpetuities and they apply equally if not more so to "employee ownership trusts".

There are strong objections to permitting perpetual trusts where an individual wishes to tie down property for the benefit of his or her descendants (known as dynasty trusts). None of these objections are relevant to EBTs.

An influential voice at the Law Commission during the last review of the rule against perpetuities, Dr Harpum, explained to Parliament that the rule exists to stop eccentric gifts. The recent Government support for EO shows that setting up a trust controlled company is not an undesirable and intrinsically eccentric thing to do.

It is the dynamics of the relevant underlying business that will primarily determine how long an EBT continues. At present when a client says “I would like this trust to last forever”, we have to say “will 125 years do?” Some have turned their back on English law and used the law of another jurisdiction that permits perpetual trusts, such as Scots law. In practice, most clients establish an English law EBT and accept, reluctantly, that the consequence is that they are storing up a problem but they hope the law will change in the meantime. Now is the time to make that change in law.

Policy-makers know of the importance of adopting a long term approach to legal forms. The Ownership Commission wanted to see the long-term creation of value in the UK.  The Tomorrow's Company's report on Tomorrow's Business Forms called for business forms that support longer-term behaviour. Changing English (and Welsh) trust law to allow the indefinite ownership of shares on behalf of employees by EBTs will be a valuable forward thinking act, that shows we are capable of devoting a little time, today, to plan for tomorrow.

Please reply to the Call for Evidence by email (janet.ford@bis.gsi.gov.uk) by 19 February 2014.

See also Death, taxes and everything – employee ownership in 2014

Sign up to our email digest

Click to subscribe or manage your email preferences.

SUBSCRIBE