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Share options & Capital Gains Tax

markdavey
Posts: 617 Forumite
in Cutting tax
Hi,
I need to clarify something. I have been given a number of 'share options' by my employer. My understanding is that when I purchase the shares at the option price I am allowed to use my CGA against any profits I make from selling said shares i.e.
sale price - option price = profit (less commissions etc.)
if profit > 8300 (or whatever CGA is) then I am liable for anything over the CGA for tax purposes.
I have had a conversation with a collegue who says that as they are options as opposed to my employer actually giving me the shares, I am liable for the WHOLE profit amount and cannot use my Capital Gains allowance.
Can someone shed some light on this for me?
Here's hoping
I need to clarify something. I have been given a number of 'share options' by my employer. My understanding is that when I purchase the shares at the option price I am allowed to use my CGA against any profits I make from selling said shares i.e.
sale price - option price = profit (less commissions etc.)
if profit > 8300 (or whatever CGA is) then I am liable for anything over the CGA for tax purposes.
I have had a conversation with a collegue who says that as they are options as opposed to my employer actually giving me the shares, I am liable for the WHOLE profit amount and cannot use my Capital Gains allowance.
Can someone shed some light on this for me?
Here's hoping
0
Comments
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Is the option scheme approved or unapproved( for tax purposes)?
Basically if its approved then you pay capital gains tax, when you sell the shares provided you stick to the rules on when you can exercise etc. If it is unapproved then you pay income tax on the gain at exercise.
There are however a number of variations that can be used so contact your HR department, who should be able to give you the full details on the scheme and your tax position.if i had known then what i know now0 -
Thanks cash99, that makes perfect sense, I'll check.0
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If you have to pay CGT on the exercise of these options you can use your CGA.0
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Hi All,
Thanks for the responses however I have now read the IR pdfs and it would seem that I have to pay income tax on the PURCHASE AND Capital Gains Tax on the Sale (if it is over my allowance) if I purchase the shares within 3 years of being given the option, see below: -
6.5 None of the income tax charges outlined in Chapter 1 paragraphs 1.1 to
1.5 will arise following the exercise of a right obtained under a discretionary
scheme approved by the Inland Revenue provided that:
• the right is exercised in accordance with the scheme which was still
approved at that time, and
• the conditions set out in paragraph 6.6 below are met.
6.6 The conditions are that
• the right is exercised at least 3 and no more than 10 years after the
employee obtained it, and
• at least 3 years have elapsed since the date on which a right was exercised
and relief from income tax granted under any approved share option
scheme, other than a savings-related share option scheme (whether or not
the scheme was run by the present employer).
Can anyone think of a way around getting taxed TWICE on the same gain??????
Thanks in advance.0 -
markdavey
The rules you are quoting relate to an apporved option scheme.
If you exercise the options in accordance with the rules of the scheme and less than once every 3 years then there is no income tax to pay on the exercise. You will pay capital gains tax when you sell the shares. However by having the gain taxed under CGT it means you get the benefit of your CGT annual exemption ( around £8k), assuming you are not already using it. Plus once you have aquired the shares you can transfer them to your spouse ( if you have one) and obtain the benefit of their CGT annual exemption and potentially lower tax rate. If you hold the shares personally for long enough you may also qualify for taper relief on the gain.
If you exercise options more than once every 3 years then you would pay income tax on the gain at exercise, plus capital gains tax on any additional profit when you sell them. Note that you are not paying tax twice.
If you make £100 gain on exercise this would be subject to income tax. If when you sell the shares they are worth £110 then you pay CGT on only £10.
All of the above assumes you exercise the shares and hold them. In most case options are exercised and then the shares are immediately sold.Know as a cashless exercise.
A cashless exercise is a two stage process, which typically happen instantaneously. The first stage is to exercise the option. In a non cashless exercise you would have to pay the company the option cost before they give you the shares. In a cashless exercise the proceeds from the immediate sale of the shares is used to pay the company for the cost of the options. With the balance, after tax as appropriate being given to you.
With some schemes it is possible to exercise the option and then sell only sufficient shares to cover the option cost and the tax. In this way you can buy the shares without parting with any cash.
In a cashless exercise the basic tax rules above still apply.
In general the approved scheme gives you the opportunity to exercise options and have the gain taxed under CGT, which for most people will result in less tax to pay. The downside is the 3 year rule on exercising.
My personal view of options is that once they become exercisable, it is your cash. Ask yourself the question of whether or not you would take the value of your options from your bank account and invest it in shares of your company. If you would lose the tax break by exercising early then add this into the equation. But remember shares do go down. It may be worth paying income tax on a large figure rather than saving capital gains tax on a lower figure.
Unfortunately I speak from personal experience. I delayed exercising some options in the hope of bigger profits, the company share price collapsed and I lost enough to clear half my mortgage. Easy come easy go!if i had known then what i know now0
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