Tax when cashing in stock options

paulobrad

Here's my scenario, I would really appreciate anyone who has experience in this letting me know their thoughts;

My employer provides me with stock options which, once vested I hope to purchase and then immediately sell. They are a company floated on the NASDAQ.

When I log in to the company who oversees the provision of the options I can run a model for what the value of the shares and my return would be once they vest. This model shows my total profit but then has a line item where 40% tax is removed before my net profit is shown.

Now, I have completed a W8-BEN form, which I believe makes me exempt from paying US taxes, so I'm unclear what this 40% amount is for and if it is correct.

Having read the HMRC website, I believe selling stock would make me liable for capital gains tax (with a 10K tax free allowance followed by either 18% or 28% rate) so I'm confused where this 40% rate has come from.

I'd like to know:
- What are the tax rules about making gains from stock and are these different based on this being US stock?
- Who is it best to contact - the company who run the stock option program, my employer of an IFA?

Thank you in advance.

pjclar02

Hello there

Firstly, I presume you are UK resident for tax purposes?

If you exercise an option to acquire vested shares in an unapproved share scheme, then you will be liable to UK PAYE and National Insurance on the difference between the market value at exercise and the price you paid for the option. This would be liable to tax at your marginal rate of income tax - potentially 42% (including NI).

Typically the scheme administrator would automatically sell a percentage of your shares to settle the tax liability arising on exercise, but this by no means happens in all cases.

You will then be liable to capital gains tax on the sale of the shares, which is calculated as the difference between the sale proceeds and the market value at exercise. If you exercise and sell immediately you will be liable to income tax only and not capital gains tax.

The rules are very different for approved share schemes, but I get the distinct impression this is an unapproved scheme.

Hope this is of some help

paulobrad

Thankyou, this is very helpful and makes a lot of sense.

My next question is what are the features of an approved vs unapproved share scheme, is there a sure way for me to know which this is and what suggests to you that this is unapproved?

00ec25

paulobrad wrote: »

Thankyou, this is very helpful and makes a lot of sense.

My next question is what are the features of an approved vs unapproved share scheme, is there a sure way for me to know which this is and what suggests to you that this is unapproved?

simples
you ask the people operating the scheme - if it is aproved they will know as they had to reguster it for approval. If its not then they may have no idea what you are talking about - QED - its unapproved
http://www.hmrc.gov.uk/shareschemes/ess-approval.htm

paulobrad

Super, will follow this up. Cheers

Doshwaster

I went though a similar process last year with my stock options were forcibly exercised when we were acquired. If the scheme is "unapproved" then any money you make out of it is taxed as income from your employment at taxed at the normal rate + NI.

So, unfortunately, you will lose up to 40% in tax (+NI). It's an absolute pain but there's no way around it. It was even worse for me as my scheme was in dollars and the options were sold when the exchange rate was really bad.

dsab

I work for a American Software company, and the broker that deals with our ESPP and Stock options etc. automatically deducts 52% from the Value of the vested options to settle the tax.

Usually in the same month my payslip will include the Value of the vested options as Income, and show the deducted Tax as "credit" for my due income tax that month. Took me a while to get my head around it, but now makes complete sense.

Doshwaster

dsab wrote: »

Usually in the same month my payslip will include the Value of the vested options as Income, and show the deducted Tax as "credit" for my due income tax that month. Took me a while to get my head around it, but now makes complete sense.

Yes, the same happens with my employer, and the payslip entries are really confusing but you have to make sure they are right otherwise you could end up owing (or due back) a lot of tax.