Selling vested shares via US broker.... How to work out the CGT and other fees?

thomB

Hi Everyone

I earned some shares with a company I previously worked for. The date when I can sell these shares is approaching but as they were a US company they are using a US broker.

I was told the broker in the US will take any taxes due but I am not sure if that is only any US taxes that apply. I will also lose money on the conversion to sterling I imagine.

My worry is that I then will have to declare CGT on this and I really have no idea where to even begin and I would really like some help perhaps with a worked example. Also isnt there a number i can make on selling shares before i have to pay any CGT?

At the moment it says my vested awards total $12,932.74

This is made up of 599 shares I can buy at $5.38 and 78 I buy at $9.52. These prices will not change that is what the company have said i can buy these at.

I plan to do a buy and sell in one order and the broker will take their fee.

Current salary is £45,000 (including this as i think i am a high rate tax payer and i think this affects CGT?)



Secondly if I do have anything left after the tax men get their teeth into it is there any advice on where to put it?

I was confused by the amount of articles on this site regarding savings vs NISA vs stocks and shares ISA VS santander current account. As I understand it I should be using my NISA first THEN the santander account (by using two cheap DDs)

I don't plan to touch the cash for over a year maybe longer and infact i plan to save regularly each month. Should I be looking at regular saver accounts only?

Thanks

xylophone

http://www.hmrc.gov.uk/taxon/sale-shares.htm

http://www.hmrc.gov.uk/cgt/intro/when-to-pay.htm

Contact HMRC for guidance if unsure.

With regard to savings, as you want to keep the money in cash, you may want to consider high interest current accounts, even though you are a higher rate tax payer and will need to advise HMRC of the interest earned.

NISA rates can be seen here. http://www.thisismoney.co.uk/money/saving/article-1583864/Best-savings-rates-Isas-Cash-Isa-accounts-fixed-rate-Isas.html

thomB

Just checked the tax that will be used and its set at 60.8% !!

This is what my company have told the broker to use. There is no way this can be right surely?

The shares are in dollars so I am not sure of the distinction between local and federal but the amount of profit I would get after selling these would be under £11,000 which I understood to be the allowance in the UK BEFORE CGT would apply.

Therefore I am wondering what tax if any I should pay in the UK at all?


Current Tax Rates as supplied by your company (as of 11/06/2014):
Local: 13.8%
Federal: 47%

SW17

I'm not sure how the US tax authorities treat this, but if you have vesting share awards they would be treated as income by HMRC at the point and value where they vest, and would be liable for UK income tax at that point (at least that's what happened to me with vested share awards in a foreign, but not US, company).

However, you talk about these shares vesting, but also talk about being able to buy them at a certain price. So these sound more like share options than share awards (which are effectively a bonus granted in shares or future shares, but you don't usually have to spend money to get them). Could you clarify on that? My experience was not with options and don't want to mislead you.

kangoora

You may want to check out the W-8BEN form and see if that applies in your circustances.

http://www.irs.gov/instructions/iw8ben/ch01.html

It is possible for you to get federal texes withheld and the money paid gross (not sure about local taxes).

I just don't have enough knoweldge to say if this will definitely help but may be worth a try.

Even if it does work you'll still be liable to UK taxes on the sum.........

thomB

SW17 wrote: »

I'm not sure how the US tax authorities treat this, but if you have vesting share awards they would be treated as income by HMRC at the point and value where they vest, and would be liable for UK income tax at that point (at least that's what happened to me with vested share awards in a foreign, but not US, company).

However, you talk about these shares vesting, but also talk about being able to buy them at a certain price. So these sound more like share options than share awards (which are effectively a bonus granted in shares or future shares, but you don't usually have to spend money to get them). Could you clarify on that? My experience was not with options and don't want to mislead you.

Yes I have to wait until 11th November for the shares to vest. I earned a certain amount every month but have to wait until the 11th November to exercise them.

I have to pay $9 per share and that price never changes I was told. At the moment the actual shares trade at $25.22 but as I say I only ever need to pay the broker $9 x 600 shares. When I say pay the broker they actually tsake the cost of the shares out of the profit of selling them so that I do not have to put any cash upfront. Its a buy/sell in one transaction. I believe they are indeed classified as options that vest on 11th Nov.

The broker told me those percentages of tax are given to them by the company I worked for. I emailed the company to find out why they are so high but no one has came back on that.

kangoora wrote: »

You may want to check out the W-8BEN form and see if that applies in your circustances.

Yes I had to fill in this exact form with the broker and post it physically off to them with my signature in ink. They said a fax was no good by US law it must be hand written. I was guided through the process of filling that in by the broker. I am sure I must pay US taxes but the part im not clear on is the Uk taxes.

The broker told me the company are the ones who have to pay the UK tax portion and when they do that whats returned to my account is my net profit (which i then need to wire and convert from US dollars to GBP).


I mean surely 60.8% is totally wrong, its almost pointless even having shares with such a ridiculous amount of tax coming off them if that is indeed the correct amount.

SW17

Ok, I don't know the deal on UK income tax regarding options, and it may vary depending whether your employer operates an HMRC-recognised scheme or not, you can get more info on this from the below link.

https://www.gov.uk/tax-employee-share-schemes/overview

Also found this link (I have no connection to this company, just googled it), which might have some info regarding options outside HMRC schemes.

http://www.taylorwessing.com/twtechfocus/options2.php

Any profit you make will likely be liable for CGT (there are some exceptions within HMRC recognised schemes) and you will have to declare it in your tax return (assuming the shares will not be within an ISA).

However, based on your figures above, you would expect to make a profit of around USD 13k if you bought all the shares and sold them at current prices. You can also deduct the broker fees from your gross profit when assessing for CGT. The first GBP 11k of Capital Gains per tax year (gains within an ISA are not counted towards this limit) are free of CGT, so unless you have other capital gains this tax year which would take you over GBP 11k, you would not have to pay CGT on this.

You are right that being a higher rate taxpayer would affect your CGT rate, the rate is 28% as opposed to 18% for basic rate taxpayers (though basic rate payers can pay more if the gain takes them over the limit). Hopefully you won't need to worry about that if your gain is under GBP 11k for the tax year.

The 60% deduction you mention sounds extraordinary, but I really don't know the law around this in the US, so suggest that you push for a reply from the company on how it was calculated, and take it from there.

thomB

SW17 wrote: »

The 60% deduction you mention sounds extraordinary, but I really don't know the law around this in the US, so suggest that you push for a reply from the company on how it was calculated, and take it from there.

Thanks for all the help and digging thus far.

The company have told me the 60.8% was wrong, but the corrected calculation is hardly looking healthy to me either

Income tax rate 38.79%(Federal) + NIC 15.8% (local) = 54.59%

The option plan is an EMI plan, which I have since discovered the NIC is indeed correct for this type of plan (13.8% employer NIC + 2% employee NIC).

What does not look right and I cannot understand is how they came to use 45% additional tax rate minus 13.8% to get the 38.79% figure.

I wonder what tax rate will be applied here tomorrow when I exercise these options. Am I right in saying it certainly should not be using the 45% rate?

EdSwippet

> What does not look right and I cannot understand is how they came to use 45% additional tax rate minus 13.8% to get the 38.79% figure.

Your 13.8% NI is deducted before tax is calculated, so the 38.79% is 45% (additional rate tax) of (100% - 13.8%), so 0.45 x 86.2%.

> Am I right in saying it certainly should not be using the 45% rate?

Perhaps.

If this scheme is like the one I'm in, under HMRC rules such options are treated as income rather than capital gains when exercised. The broker is instructed by Megacorp to take a 'worst case' tax withholding that may be more than your actual income tax rate. Unless you earn more than £150k this year, you should get the difference between this and your actual tax back, either from HMRC via self assessment or perhaps earlier from your employer via payroll. Either way you'll end up paying the 'right' amount of tax, whatever that is, after April, so fretting over this withholding rate may not gain you much of anything.

The 'US federal' tag is almost certainly utterly bogus. The US has scant concept of other countries or currencies, and more often than not US brokers have nowhere in their system in which to store non-US tax rates, so they 'overload' the 'US federal' database field. Likewise 'local' is normally US state and/or city tax but has to be re-purposed to hold UK NI. As a (presumably) UK citizen living and working in the UK and with (presumably) no connection to the US beyond working for a company whose stock is listed in the US, you have no US tax liability. Unless you hold the stock and receive dividends from it, that is.

By the way, the very worst case is where this income falls into the UK's effective 60% tax band just above £100k. Because of loss of personal allowance, in this band you pay .6 x 86.2% tax and 15.8% NI, so total loss to the government is an eye-watering 67.52% of your gain.

jamesd

As you have discovered, the non-exempt schemes normally used by US employers are not subject to capital gains tax at the time of option exercise. Instead they are taxed as PAYE income. How your employer will handle this depends on the specific scheme but in general the idea is that the deductions are withheld by the broker and paid to your employer, who then uses that money to pay the PAYE tax obligations. You'd get to pay any extra or keep any overcharge.

An employer may try to get your personal tax rates right on the trading site or may make assumptions about average or even highest possible rates to ensure that the amount they might have to chase you for is low. Since options are often exercised by departing employees the collection can be troublesome.

You may not be aware of it but in normal investment theory the time to hold options is until the last trading day before they expire. Allow some safety margin, of course. The reason for this is that part of the value of an option is the choice of when to exercise. The longer you keep that choice, the greater the value and the greater the potential growth in the value of the shares.

Ensure that you have a current W8-BEN and there will not be any significant US tax, just the UK PAYE.

If you exercise and hold the shares, you would then be liable to CGT on the gain between the price at the time of option exercise and the price a the time of sale. This works just like any other share purchase in the UK and of course you do get your annual CGT allowance.

I think that EdSwippet is on the right track for the calculations. I don't know whether they are allowed to take off the employer 13.8% NI before calculating your employee NI and income tax liability, though.

Don't worry about the federal and local tags, they are just being used for income tax and NI parts as the best way to fit them into a US-orientated broker system.

thomB

Thanks everyone so far very helpful. The tax is eye watering and I am not in a position to buy and hold unfortunately as I lose the options on 20th Nov if i do not exercise as I have left the company, and I have 90days from leaving to exercise or lose em.

I finally figured out how they were doing the calculation and yes it seems that they do use a worst case scenario.

How they done it is:

1. I agreed to pay employer NIC as I had to sign a joint election to excersise these options.
2. They then add that 13.8% to my 2% employee to get their 15.8%.
3. Next they take the top income tax rate (45%) and then multiply that by 13.8% to give them 6.21%.
4. This is then deducted from the 45% because I am allowed to deduct the employer NIC as im paying it from my income tax. this gives the 38.79% number.


Indeed both broker and ex company have said that they will withhold any tax liable so i'm assuming my ex company still has to pay HMRC on my behalf as that's what it says in the agreement I signed. I see nothing about employees leaving.

Another thing that's added more confusion to this is that this is an EMI option, which I thought was exempt from income and NIC tax?