Reducing Tax Liability from Company Share Option

darenmatthews

Hi all,

I work in the UK for an American company and part of my remuneration is a share option.

I was granted 6000 shares and they are currently trading at around USD 35.00 on the NASDAQ.

I know next to nothing about shares and tax planning, so I would sought some advice from this forum. I was told that once the shares are vested and sold, the amount I receive will be treated as benefit-in-kind and will be subject to Income Tax and National Insurance.

This surprised me as the tax take will be about 53 percent.

I would like to know if it is possible to reduce or mitigate this tax liability? Can I take advantage of offshore savings or something similar?

Forgive my ignorance of the subject, and thank you in advance of any advice.

- Daren

jimmo

You seem to have had some pretty good advice already on the Savings and Investments Board. I don't know how important it is to you but if you are in an unapproved share options scheme your "profit" will not be a Benefit in Kind. It will be taxable earnings and your employer will have to operate PAYE and take the tax and NI from you.
My professional experience of these schemes is rather dated but my understanding of "vesting" is that whilst you have been granted a shares option at some time in the past the vesting date is the first date that you can "exercise your option", in other words, buy the shares.
That doesn't necessarily mean that you have to exercise your option on the vesting date but there could be a single option meaning that you only have one chance to buy the shares.
There could be a "vesting period" allowing you to buy shares at different times within a set time limit.
Your options could even be open ended allowing you to buy shares at any time after the vesting date.
So your tax planning opportunities are almost certainly limited by the conditions imposed by your employer when granting the share options.
When it comes to exercising the options the basic principles are that:
You buy the shares at the option price. You automatically become liable to tax and NI on your profit, the difference between the option price and the open market value of the shares and your employer has to operate PAYE and take the tax and NI from you.
If you have the cash available you could actually pay for the shares and the tax and NI and end up as a shareholder getting dividends and worrying about Capital Gains Tax when and if you sell the shares.
Far more commonly people don't have the cash available to pay for the shares, tax and NI and they, effectively, buy (at option price) and sell (at market value) on the same day. The employer then takes the cost of the shares, the tax and NI from the sale proceeds and pays the employee his net profit.
From memory, there have been a few threads on here where a US employer has used a US broker to do the buying, selling and tax deductions and the brokers have also deducted US tax on top of the UK tax and NI. The US tax seems to have been recoverable but it is another level of red tape that you may have to deal with.

jamesd

As jimmo writes, it's not benefit in kind, the gain is salary, just like a bonus for the year in which you exercise the options.

The tax take will be something like 40% income tax, 2% employee NI and 13.8% employer NI for a total of 55.8%. Don't expect your employer to pay any of this, it'll almost certainly all be taken from you. Assuming it's Fidelity they will have been configured by your employer to deduct something reasonably similar from the proceeds of the sale. Your employer will be notified and will make any additional adjustments on your next payslip after that notification (subject to lead time requirements for payroll). If you exercise near the end of the tax year you may find that you get a supplemental payslip to do this work. If money is due the company will probably deduct it from your next payslip, the first in the new tax year.

You will not have to pay US tax if you have certified that you are not a US beneficial owner with an online or paper W8-BEN declaration. Fidelity will have made sure that you did that during initial signup and it'll probably be shown somewhere in your personal profile.

Your best tax option is probably to work out how much the gain will be using the preview at say Fidelity then exercise enough options so that the gain doesn't take you above £100,000. As well as or instead of that you could contribute money into a pension to reduce your taxable income, subject to the limit of £50,000 plus any carryover allowed from past years in which you were an active (contributing) member of a pension scheme.

If your employer operates a salary sacrifice scheme, using that in advance planning will be the best way to deal with this since it'll eliminate the NI 15.8% part of the tax bill. You'd set up a sacrifice to cover most of the expected profit for that year then exercise the options. If the benefits year isn't aligned to the tax year you'll need to work out how much to exercise in each tax year so you cover the sacrifice in the before and after April parts of the year. Something like a January benefits year start would require 1/4 of the exercise before April and 3/4 after.

You'll find that Fidelity gives you the option to sell and have the profits cover the cost of the exercise of the shares. Often called sell to cover, it's a completely standard option.

You're likely to have five or ten years to exercise, possibly counted from the date or granting of the options. Vesting may be staggered and you won't be able to exercise an option until it's vested. Your statement would normally show you the breakdown of vested and unvested options and the date by which you must exercise.

If you leave the company you'll have a short time to exercise any vested options. You'll probably lose any unvested options. If this matters to you, check.

I've assumed that it's a major company that uses something like Fidelity netbenefits.

darenmatthews

Jamesd and Jimmo,

Thank you very much indeed for this valuable information. The replies are especially useful since they answer so many questions and make great suggestions as well.

The company use ETRADE and my shares are vested over 4 years. I can take 25 percent after year 1 (which will be July 5th of this year) and the rest gradually vested each month thereafter.

I have completed a W8-BEN declaration, I do not yet contribute to a pension (wrong, I know) so I may well use this suggestion as well.

I have copied your post and have it safely stored away for reference. It's just about the best advice I have received in ages and I thank you for it, very much.