Tax on sale of US shares

zebedy · 23 March 2017 at 11:55PM

I am selling some restricted Stock units that have vested (they were gifted to my by my company). I was surprised to see 47% of the vested units have been withheld to cover for foreign tax (it's a US company but I am a British resident and have filed the W8BEN to be exempt from US taxes).
Why is it 47% that has been withheld?
It is under the capital gains tax threshold.
Any advice would be welcome, thanks

EdSwippet · 24 March 2017 at 12:42AM

RSUs given to you by your employer are treated as taxable income at the point where they are handed over (vesting). Generally, the broker will 'auto-sell' some of them for you to pay the tax liability, based on a flat-rate (over-)guesstimate of what the tax liability will be, say 47%, and the employer then balances this out at the next pay period so that the right tax is actually paid.

So say you vest 100 shares at $1, to keep the numbers simple. The broker might withhold 47 shares on vesting, so you wind up with 53 shares in your account. At the next pay period your tax rate is actually 20%, so you then get 47 - 20 = $27 back in extra salary, as a refund of the over-withholding. When you sell the 53 shares there's a capital gain calculation to make, but up to then capital gains tax doesn't come into things. Your cost for these 53 shares would be $53, so no added complexity in finding that. (The main complication would be the USD to GBP forex rates on assorted transaction dates, but I'll leave that aside since all it does is just complicate things even further.)

As for "foreign" tax... is this account being held in a US-based brokerage? If yes, then this "foreign" tax is probably UK tax, just foreign to the brokerage. 47% sounds like the sort of number a UK employer would ask a brokerage to withhold to be sure of covering both tax and potentially also NI.

Although mostly guesswork and supposition, this is the best explanation I can come up with, based on experience of this in the past. Of course, it's possible that the brokerage and/or your employer have made mistakes here and that I've guessed all of this wrongly, but it is at least reasonably likely that it's working as intended, just not in a fashion that is in any way intuitive or transparent.

Spidernick · 24 March 2017 at 12:49AM

Are you sure it's foreign tax? Sounds like 45% UK tax and 2% UK NI to me, with sufficient shares sold to cover the UK liability. I see that all the time.

Of course, UK tax and NI is 'foreign' from a US perspective.

zebedy · 24 March 2017 at 8:47AM

Hi. Thanks for the replies this is really useful.
Yes the description of foreign tax is foreign to them and refers to U.K. Tax. When you say that I'll recoup some or all of the withheld amount at my next pay point, do you mean at my next monthly salary or end of financial year?
I didn't think it had anything to do with payroll as the money for rsu's that were available that I've sold comes to me by cheque and I don't think anything shows up on my payslip.

EdSwippet · 24 March 2017 at 9:34AM

In my experience (which may not be the same as yours), I got a small bump in normal payslip/salary a month or two after vesting RSUs. This was a refund of the over-withholding, passed on that way so that in effect the entire vesting is handled via payroll. Nothing on RSU sales, though, since at that point both the company's and the broker's responsibility to withhold tax on salary had evaporated, leaving just possible capital gains for you to handle.

Check your payslips for a month or two after vesting for any "funny" looking extra amounts. If yours are anything like mine, the labelling on these will be far from clear. If you can't sort it out from that, I'd just query it with your employer. I'm sure this won't be the first time somebody has asked them about this. It's a confusing system, for sure.

Cook_County · 24 March 2017 at 11:38PM

zebedy wrote: »

Hi. Thanks for the replies this is really useful.
Yes the description of foreign tax is foreign to them and refers to U.K. Tax. When you say that I'll recoup some or all of the withheld amount at my next pay point, do you mean at my next monthly salary or end of financial year?
I didn't think it had anything to do with payroll as the money for rsu's that were available that I've sold comes to me by cheque and I don't think anything shows up on my payslip.

It would only 1 in million cases that it would not show up on a payslip. Have you asked your employer?

zebedy · 25 March 2017 at 7:48AM

Thanks. I'll check the payslip. The vesting took place in the same month that I got my annual bonus and salary increase and so possibly I missed it as the payslip didn't look the same as the other 11 months.
I guess I hadn't realised that vested shares were subject to income tax and NIC. I had only considered potential capital gains tax liability when they are sold, and since they vested and I sold in the same week i hadn't really got my head round it.
Anyhow it is all effectively free money as it is the fruition of a long term incentive reward.
Thanks, it's been an education!

Tax on sale of US shares

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