Share Options - income/CGT

gazareth

Hi,

Last year the company I work for granted me a bunch of share options, which become exercisable in five batches, one per year for the next five. The first batch is eligible for exercise tomorrow.

The company is traded on the NASDAQ (although I am in the UK and contracted to the UK entity) and the options are handled through Morgan Stanley Smith Barney. According to the info pack I have, when I want to buy & then sell the shares available to me, I will receive the funds via payroll, with income tax and NI deducted. Question is, shouldn't it only be the initial share offering that is subject to NI, with the rest subject to CGT?

And if so, how would I go about rectifying this in the self-assessment? If I get the funds through payroll then won't it show up as income on my p60?

martinsurrey

As always with tax,

It depends on the scheme and structure.

If you exercise the options are the shares registered in your name, or held in some special corporate trust structure?

I doubt the shares are in your name (as otherwise you could sell them outside payroll).

If it’s a complicated unapproved scheme, it could be entirely right that the entire amount is subject to NI and Income tax at source.

Sorry, but without a lot of complicated detail and work, no one on here can tell you anything for sure.

framauro

gazareth wrote: »

Hi,

I will receive the funds via payroll, with income tax and NI deducted. Question is, shouldn't it only be the initial share offering that is subject to NI, with the rest subject to CGT?

And if so, how would I go about rectifying this in the self-assessment? If I get the funds through payroll then won't it show up as income on my p60?

I exercised share options last year in a similar scheme.

I had the choice of buy-and-sell (e.g. take profits between market price and grant price), buy-and-keep (e.g. buy and keep shares in my own name). I chose buy-and-sell.

In this case, the sale is treated as part of your income (is effectively a deferred taxable benefit from the employer) and so is subject to income tax and NI at the time of exercise; there is zero cost incurred at time of grant (well, not in my scheme, at least - yours sounds similar).

In that month's payslip I had an additional line item 'sale of share options' with the gross amount (in GBP after conversion from USD) and my tax and NI for the month were increased by the appropriate and expected amount (UK taxation only - there was no US taxation involved, as it is UK income earned via UK employment).

So, in summary, yes this income will appear on your P60 and will count towards your 'adjusted net income' if you are concerned about High Income Child Benefit charge. Your self assessment you will need to indicate your entire gross income including the share option proceeds i.e. from total income on your P60.

gazareth

framauro wrote: »

I exercised share options last year in a similar scheme.

I had the choice of buy-and-sell (e.g. take profits between market price and grant price), buy-and-keep (e.g. buy and keep shares in my own name). I chose buy-and-sell.

In this case, the sale is treated as part of your income (is effectively a deferred taxable benefit from the employer) and so is subject to income tax and NI at the time of exercise; there is zero cost incurred at time of grant (well, not in my scheme, at least - yours sounds similar).

In that month's payslip I had an additional line item 'sale of share options' with the gross amount (in GBP after conversion from USD) and my tax and NI for the month were increased by the appropriate and expected amount (UK taxation only - there was no US taxation involved, as it is UK income earned via UK employment).

So, in summary, yes this income will appear on your P60 and will count towards your 'adjusted net income' if you are concerned about High Income Child Benefit charge. Your self assessment you will need to indicate your entire gross income including the share option proceeds i.e. from total income on your P60.

Thank you, that is very helpful. Presumably if you choose the buy-and-keep option then it can be treated differently? I know that I have those two options, as well as a "buy-and-sell-to-cover" option (i.e. just sell enough shares to cover the purchase price).

framauro

gazareth wrote: »

Thank you, that is very helpful. Presumably if you choose the buy-and-keep option then it can be treated differently? I know that I have those two options, as well as a "buy-and-sell-to-cover" option (i.e. just sell enough shares to cover the purchase price).

Yes, I had that as a third option also - forgot about that one!

If you buy and keep then you are still taxed upon share option exercise; instead of receiving extra money in payslip you are receiving ownership of shares - this is still a taxable benefit. Until this point you had owned and received nothing, you simply had an 'option to purchase'. This is why you never paid tax previously.

In addition you are subject to CGT at the time at which you SELL your now-owned shares - this gain is based on difference between market value at time of exercise versus value at time of sale (of course remember you also have a CGT tax-free allowance of ~£10600 per year in 2013). The fact that they were purchased via options is irrelevant (i.e. no further tax implications).

According to my share option scheme documentation:
"If you wish to exercise your options and choose to hold onto them, you will be requested to pay for
the shares, the PAYE taxes and the NI charges at time of exercise. Capital Gains Tax is then payable
on any profit arising from the disposal of shares, since you are disposing of your assets."

i.e. the exercise is always subject to income tax and NI regardless, if you keep the shares then the subsequent sale is subject to CGT.