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  • FIRST POST
    • tdubya
    • By tdubya 12th Sep 17, 4:54 PM
    • 19Posts
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    tdubya
    US Taxation and Shares vesting advice ??
    • #1
    • 12th Sep 17, 4:54 PM
    US Taxation and Shares vesting advice ?? 12th Sep 17 at 4:54 PM
    I appreciate this question might be outside of the remit for this forum but I'm out of time and ideas. Any help would be much appreciated.

    5 years ago, I was gifted 500 shares by my US company who I work for in the UK. These are about to vest in me this weekend. Naively I never gave a thought as to their being any tax due until I was told by the US share services person last week.

    Apparently, I have a choice between paying the tax due in cash or having the tax paid by having some of the shares cashed in at the time of vesting.

    The real sickener is that the tax rate is 42%. Does anyone in the know about US tax have any suggestions as to which option I should take and why... Also, is the 42% rate correct ?
Page 1
    • Daniel54
    • By Daniel54 12th Sep 17, 6:58 PM
    • 569 Posts
    • 661 Thanks
    Daniel54
    • #2
    • 12th Sep 17, 6:58 PM
    • #2
    • 12th Sep 17, 6:58 PM
    The shares are taxed as income under U.K. rates. The assumption in your case is that you are a higher rate tax payer and are therefore liable to pay 40% tax and 2% NI.US taxation has nothing to do with it.
    • bowlhead99
    • By bowlhead99 12th Sep 17, 7:01 PM
    • 6,692 Posts
    • 11,891 Thanks
    bowlhead99
    • #3
    • 12th Sep 17, 7:01 PM
    • #3
    • 12th Sep 17, 7:01 PM
    If I'm reading you correctly, five years ago you were allocated those shares on a restricted basis ie locked up for five years and not available to you before then.

    I'm assuming you and the company didn't make any tax election to treat those restricted shares as if they were unrestricted shares five years ago - because that could have resulted in you needing to pay tax and NI on the value of the benefit of you receiving fully unrestricted shares, even though they were restricted at that point and you'd have needed to surrender them if you'd left the firm during the five years.

    So, that generally means you will just be treated as having suddenly been given 500 valuable shares by your employer at the point of vesting, ie when you're allowed to have access to them (rather than five years ago when you couldn't do anything with them). As a share based incentive deal run by an American company (rather than an HMRC approved sharesave or UK employee share incentive scheme) there probably won't be any special UK tax breaks.

    So if you're given 500 shares free and clear to do what you want with... as compensation for the work you do as part of your UK employment... and those shares are worth (say) $13k or £10k... you can see where this is going.... you're going to need to pay UK tax and national insurance on that £10k of UK earnings.

    Most of the people who get valuable share-based compensation from their employers are high rate taxpayers, and the marginal rate of tax for a UK high rate taxpayer is 40%. And if you're in the high rate tax bracket, you pay 2% NI on every new pound of employment income. Combined, that's 42%. Your employer needs to ensure the tax and NI is paid over to HMRC under PAYE, but depending on the value of these 500 shares they gave you, it might be impractical to withhold that amount of extra tax and NI from you (out of your ordinary payslip with your monthly salary) for this one off event, because that might leave you with very little net pay, or even negative.

    So, the suggestion from the shareholder services person is that either

    -you can send them all the tax and NI that needs to be given to HMRC, for them to pass on, and then you will have the shares all to yourself to do whatever you want with. Or,

    - they can sell a percentage of the shares to settle the tax and NI bill (ie, about 42% of the shares, assuming the market price hasn't moved much since the date of vesting), and then the remaining shares will be yours to do whatever you want with ; you'll have fewer shares but won't need to have laid out any cash to pay the tax on your "income".

    So in summary this unavoidable 42% of tax is nothing to do with US income tax (as you're not a US employee, and it can't be US tax on the dividends as the shares only vested last week and presumably no dividends are due yet). It is just plain and simple UK income tax and UK NI.

    It might be that actually you are not a UK high rate taxpayer on all of this money, and the share services person has just assumed you are because most of their UK senior staff are. Perhaps for example you are only a basic rate taxpayer paying 20% income tax and 12% NI for a total of 32%. In that situation, if they sell 42% of the shares to raise money, there is more cash available to pay the tax than your eventual tax bill. So if they made the wrong assumption and it got overpaid this month, it would be sorted out and normalised across later payslips later this year.

    Or alternatively perhaps with this big bonus you are an even higher rate taxpayer and owe more UK tax than 40%+2%. If you underpay, it will still catch up with you in the end.

    Edit - Daniel beat me to it by being more succinct!
    Last edited by bowlhead99; 12-09-2017 at 7:03 PM.
    • EdSwippet
    • By EdSwippet 12th Sep 17, 9:20 PM
    • 545 Posts
    • 509 Thanks
    EdSwippet
    • #4
    • 12th Sep 17, 9:20 PM
    • #4
    • 12th Sep 17, 9:20 PM
    ... any suggestions as to which option I should take and why.
    Originally posted by tdubya
    As for what to do once the tax is sorted out... ask yourself if you would buy shares in your company if they gave you this bonus in cash instead of shares? If the answer is no, then consider selling the lot and doing something else with the money. Keeping vested bonus shares is equivalent to buying them with cash.
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