Reducing Tax on Stock Options or RSUs

LukeSkywalker007

I have some shares and RSU which is held by a broker, Fidelity for a US company. I am employed and would like to turn some of the shares into cash. The broker withholds tax on them. How do I add these to self-assessment? I do self-assessment as I rent out a flat.

EdSwippet

The usual way RSUs work is as follows. When they "vest" -- that is, you're promised some perhaps every quarter, say, and that quarter's end rolls around -- the broker will automatically convert some of them into cash as tax withholding, put the remainder into your account as shares, and then some number of payroll cycles later your employer will reconcile this withholding with your tax code through their normal payroll system, and (usually) you get a bit of a refund on it.

For example, say a grant of six RSUs vests and the share price is $10 at the time. Broker withholding is set to perhaps 52%, comprised of 12% NI and 40% tax. This 52% is a top-end estimate, not what you would actually owe. So four shares are auto-sold to provide $40 tax/NI withholding, and you receive two shares in your account. Later on your company payroll runs, and as your real tax rate is 20% you receive perhaps $12 in over-withholding refund. (Numbers are rough and ready here, but you should get the gist.)

At the end of the year, assuming your company has put these RSUs through their payroll, your income part of this RSU stuff simply drops out of the numbers on your annual P60 or P45 and for that bit, you're done. Your employer's RSU scheme documentation should detail this for you.

Now, when you come to sell these two shares later on you have a cost price of $10 each, If you sell both at $12/share you have a $4 capital gain, and perhaps the pleasure of filling out the capital gains part of your tax self-assessment after April (though if everything falls under the CGT allowance and you don't realise more than 4x the allowance in a year you get to skip this administrivia -- in practice most folk can probably skip it). The broker should not withhold anything further here for tax of any type.

The most miserable part of all of this is that as the shares are priced in USD, you have to convert everything to GBP for your tax return. For the income part, your employer will handle all that via payroll. For the capital gains part, you yourself would have to find the USD/GBP rate on vesting, the rate on sale, and then compute the capital gain in GBP for any tax return. Again though, if the sums here are small and definitely within the annual capital gains allowance you might be able to just skip that step, as below the allowance the actual numbers don't matter.

In short then, RSUs are income when they vest. When you sell them, they may (or may not) have a capital gain which may (or may not) trigger the capital gains part of a self-assessment tax return.

LukeSkywalker007

This is really clear. Amazing. Thank you very much. I will do some work on this straight away.