Unapproved share options

Glass

I saw the previous post at https://forums.moneysavingexpert.com/discussion/5866166/cgt-or-income-tax-on-us-stock-options, but my case is slightly different.

I have some options that are partially vested. The company is private right now, and so the shares aren't liquid, but I have reasonable confidence that they will become so in the next five years.

As I understand it, if I purchase the vested options now, I will have to pay:

• For the shares themselves (# of options exercised * exercise price)
• Income tax and employee NI on the uplift in value (the exercise price is lower than the current valuation) plus the amount I paid for the shares
• Potentially, employer NI on the above, too (I will need to check with the company about this)

And then, if the shares become liquid in future and I sell them, I would have to simply pay CGT when I sell them.

Alternatively, if I do nothing now, I pay nothing. But I will potentially have to pay more income tax and NI if I exercise in future and the shares increase in value.

I know this sounds basic, but is that correct? If so it will help me with my modelling - I can quantify the likelihood (in my opinion) of the shares being worthless, and the range of values I think are likely, and then see if I think it is worth taking the income tax hit now based on possible CGT savings in future.

Also, is there anything I neglected to consider? I assume income tax is applied using normal rules - meaning if I was a HRT and increased my pension contributions to push myself below the threshold, I'd also reduce the income tax liability on any exercise.

jimmo

You've got it. Even with private companies there is frequently an opportunity available to exercise an option and immediately sell back all the shares or sufficient shares to meet the immediate tax liability. So you could end up with a cash lump sum and no shares, a lesser number of shares than the options with no cash cost to you or the full amount of shares at a cost.
Yes, Income Tax is charged in the normal way, the "profit" on exercise simply counts as employment income.

EdSwippet

Glass wrote: »

Income tax and employee NI on the uplift in value (the exercise price is lower than the current valuation) plus the amount I paid for the shares.

I am not sure about the 'plus' here.

From your description these sound like normal stock options rather than RSUs ('restricted stock units'). In that case, on exercise you pay tax and NI on the uplift, but not on the (post-tax!) money you have to put in yourself to exercise the options in the first place. (The way this often works in practice is with 'exercise to cover', where you don't actually put in any money but you come out with fewer shares than exercised because a chunk of them are immediately sold to pay the initial cost plus taxes. But that amounts to the same thing.)

Other than that, it looks about right on the brief details given.

Glass

From your description these sound like normal stock options rather than RSUs ('restricted stock units'). In that case, on exercise you pay tax and NI on the uplift, but not on the (post-tax!) money you have to put in yourself to exercise the options in the first place. (The way this often works in practice is with 'exercise to cover', where you don't actually put in any money but you come out with fewer shares than exercised because a chunk of them are immediately sold to pay the initial cost plus taxes. But that amounts to the same thing.)

I was basing the 'plus' on https://www.gov.uk/government/publications/employee-share-and-security-schemes-and-capital-gains-tax-hs287-self-assessment-helpsheet/hs287-employee-share-and-security-schemes-and-capital-gains-tax-2018#unapproved-employee-share-or-securities-options:

If you exercise an unapproved share option, the capital gains cost of your shares is the total of:

• what you pay for the option (if anything)
• the price you pay for the shares when you exercise the option
• the amount chargeable to Income Tax on the exercise

However, the exercise cost is very favourable to me, so it's not hugely important to my calculations one way or the other.

Thanks for the info on 'exercise to cover', I will check with my employer about that - this was very helpful!

Glass

Actually, I see that I misread it. It's saying that for future CGT purposes (when I sell the shares), the amount they are considered to have cost me is the amount I paid for the option (zero in my case) + the amount I paid for the shares + the tax I paid.

It is not saying that I have to pay income tax on the amount I paid for the shares - just the difference between that and the current value, which also is more sensible, and I suspect is what you were pointing out!