Share Options

Pumpkinface_2

Hope somebody can help me with this one.

My husand and I used to live in Bermuda and were non resident for tax purposes. Whilst my husband was there, he was given some share options in his company which vested in May 2008. He did not buy the shares immediately however and then we returned to the UK in August 2008, becoming tax resident from that time. He transferred to the UK sister company of the Bermuda companyhe worked for.

Last month, he decided to exercise his options and immediately sell the shares. The share scheme is not an approved scheme under UK government (and in any case he was given the options whilst he was in Bermuda), but what I mean is the similar scheme for UK based employees is not one of the government approved schemes.

Now, had my husband been in the UK throughout, I would have said he owed income tax on the difference between the option price and the value of shares on the date they vested and then CGT on the gain since vesting date.

However he was not UK resident at the time he received the shares options or the date they vested, so if he had exercised the options immediately or at any time before he left Bermuda he would not have paid any income tax. So I think he is liable for CGT on the gain since vesting, but not income tax on the shares as this was earned in Bermuda.

His company carried out the transactions and deducted income tax based on his profit. i.e. the difference between the share at his option rate and the market value on the day he sold them. I think this is incorrect - any thoughts?

Londonboy_3

If he was non resident at award there is no income tax charge on vest, so you will need to reclaim the PAYE operated via filing a UK tax return.

There will be a CGT liability based on sale proceeds less cost of the shares (ie the MV at award) - liability calculated by offsetting his annual exemption against the gain and tax payable at 18% on 31 Jan following end of the tax year.

Pumpkinface_2

Londonboy wrote: »

If he was non resident at award there is no income tax charge on vest, so you will need to reclaim the PAYE operated via filing a UK tax return.

There will be a CGT liability based on sale proceeds less cost of the shares (ie the MV at award) - liability calculated by offsetting his annual exemption against the gain and tax payable at 18% on 31 Jan following end of the tax year.

Thanks Londonboy, this is what I thought too and we argued the toss with his company before they deducted the tax but they would not listen.

Pumpkinface_2

I have now done all the maths. There were two lots of share options, one lot vested whilst in Bermuda and the other when we were in the UK. So I have calculated taxable income on the shares that vested whilst we were in the UK. As:

(Mkt value@ vesting - option price) x no of shares. = taxable income

I have then calculated a capital gain on all the shares (those that vested in Bermuda and in UK) as

(Mkt value @sale - mkt value @vesting) x no of shares = Capital gain.

The trouble is, his company have deducted 41% tax (assume 1% is NI) on both the taxable income and capital gain and indeed on the income from the shares that vested whilst we were in Bermuda.

So it looks like they have done this very wrong. I am wondering if it is normal for companies to deduct 41% and leave the employee to claim back the overpayment at the end of the year?

letitcomedown

I've been through this last year; my employer took off NI and income tax on gains from stock options issued overseas.

Gains derived from share options issued while overseas are free of UK income tax but liable to capital gains tax. There are some criteria, e.g. the issuing of the stock options must not have been linked to a future return to the UK.

Here's the HMSO advice.
http://www.hmrc.gov.uk/bulletins/taxationso.htm

However, your employer has a statuatory requirement to take off NI and tax if they think it may be due; so I would advise you to do what I did, and contact the HMSO representatives in the above link, explain the details, and they should provide written guidance to you and write a letter or email to your employer confirming tax should be refunded. Even then it took some haggling but in the end they gave me the money.

Debt_Free_Chick

Pumpkinface wrote: »

The trouble is, his company have deducted 41% tax (assume 1% is NI) on both the taxable income and capital gain and indeed on the income from the shares that vested whilst we were in Bermuda.

Sounds like the normal withholding US tax to me i.e. the UK company have not retained the tax. Instead, it was deducted in Bermuda and retained there, but the UK company put it through PAYE so it's recorded to help you do your tax return.

If so, the UK company had no option here, other than to confirm, via PAYE, that the US tax has been withheld. You will have to sort out any tax not due/to be reclaimed from HMRC - probably through self assessment.

Pumpkinface_2

Thanks debt-free-chick and letitcome down.

In fact having done the maths since my first post, it turned out that the income deducted on share options received overseas was not much of an issue after all (due to the share price not being much more than option price). In fact it was only a few hundred pounds so we will live with that.

The real issue turned out to be that much of the money he received was capital gain, i.e. the share price went up a lot since the shares vested. But his company deducted 41% on both the income and the capital gain. I think they should not have done this as CGT rate is only 18%.

I realise we can claim it back, but I am sure it will be a lot of hassle and I don't think we can do this until the end of the year now and so I wondered if 41% deductions on capital gain element was standard practice?

Debt_Free_Chick

A deduction of 41% on US capital gains is common, in my limited experience working for a US owned company, with share options. It's not that the UK employer has deducted this .... rather that the US company (custodian) has had to retain this. The UK Employer then records this via PAYE for information and to make reporting to HMRC easier.

However ..... are you sure that these are Share Options? They're not what the US call RSGs .... Restricted Share Grants or Restricted Share Awards, are they? If they are, then my understanding is that the gains are taxed as income and not capital gains. The reason being that these are effectively a bonus, but paid as shares rather than cash. We've had horrendous tax issues with these in recent years, but the tax treatment of RSGs is down to HMRC and not the employer.

If they are RSGs, then the US tax at 41% should exactly match the UK income tax liability for a higher rate tax payer i.e. 40% income tax and 1% NIC.

You need to read the Company's policy relating to these awards to see if they're "Restricted Share Grants/Awards" or "Share Options".

HTH

Pumpkinface_2

Well now I am gettting really confused . To clarify, the company does not have any connection to the US whatsoever (neither does my husband). It has a Bermuda office and a London office, the official head office is Bermuda. The tax deducted is definitely nothing to do with the US.

The shares are listed on the UK stock exchange, the transaction was in GBP and the custodian is in the UK as well. According to the transaction advice, they have deducted tax as per instructions from the employer.

The awards were given to all staff, I will have to check with husband as to the nature of it, it wasn't an individual bonus but I believe it was something to do with overall company performance. There is a strike price, which led me to think they are options. But I will check the paperwork and see if in fact these were something else.

Thanks again for help

Debt_Free_Chick

I may have confused and if so, I'm sorry

Your mention of a Bermuda company led me to wonder if this is a company that's quoted on the US stock exchange, so that the share options (or RSGs) were actually US shares.

Important to see if the shares are those quoted on the US or on the UK stock exchange.


HTH

Pumpkinface_2

Debt_Free_Chick wrote: »

I may have confused and if so, I'm sorry

Your mention of a Bermuda company led me to wonder if this is a company that's quoted on the US stock exchange, so that the share options (or RSGs) were actually US shares.

Important to see if the shares are those quoted on the US or on the UK stock exchange.


HTH

Ah ok, no doubt about that, they are definitely not on the US stock exchange. I take it that is good news? :cheesy: