Understand Tax on Stock Options and RSUs

cac87

I read the threads on this topics but I'm still missing some information and i hope someone will be able to answer my questions below
I have been granted different shares by my employer over the past years and I would like to sell them soon.

I received 2 types of shares, and let assume those numbers:
A. Stock Options in 2016:
- 1,500 units
- 6.25% vested/quarter (94 units)
- ~1,200 already vested
- Exercise price: $30

B. RSU:
B.1. 2017:
- 700 units
- 25% vested/year (175 units)
- 1 year received so far but only 85 shares available (due to “sell-to-cover”?)
- Share value when vested: $60
B.2. 2018:
- 1000 units
- 25% vested/year (250 units)
- Nothing received so far

If we assume that the current share is $100 and I sell now, my questions are:
1. For the Stock Options:
1.1. Will the excercise price be deducted to the share value when I will sell the shares?
($100-$30)*1,200=$84,000
1.2. What type of tax will be applied (Income earning or Capital Gain)?
1.3. Which % of tax will be applied?
2. For RSU:
2.1. How much should the “sell-to-cover” represent (in %)?
2.2. Will i receive $100*85=$8,500?
2.3. On which amount will the tax be applied? is on ($100-$60)*85=$3,400 ?
2.4. What type of tax will be applied (Income earning or Capital Gain)?
2.5. Which % of tax will be applied?

Thanks!

londoninvestor

csgohan4 wrote: »

This is a uk site

I can't speak for the OP, but I live in the UK, worked for a multinational and received dollar-denominated RSUs and needed to understand their UK tax implications, so it's a relevant question.

londoninvestor

I'm not so well up on the options - but I'll have a go at your RSU questions.

cac87 wrote: »

B. RSU:
B.1. 2017:
- 700 units
- 25% vested/year (175 units)
- 1 year received so far but only 85 shares available (due to “sell-to-cover”?)
- Share value when vested: $60
B.2. 2018:
- 1000 units
- 25% vested/year (250 units)
- Nothing received so far

If we assume that the current share is $100 and I sell now, my questions are:

2. For RSU:
2.1. How much should the “sell-to-cover” represent (in %)?
2.2. Will i receive $100*85=$8,500?
2.3. On which amount will the tax be applied? is on ($100-$60)*85=$3,400 ?
2.4. What type of tax will be applied (Income earning or Capital Gain)?
2.5. Which % of tax will be applied?

Thanks!

2.1 Ideally it would be just enough to cover the additional tax and NI due when the options vested. That depends on your other earnings and tax allowances. e.g. if your other earnings were £70,000 and you got £10,000 worth of RSU's, you'd expect to have 42% withheld (40% for income tax and 2% for NI). If your other earnings were £200,000 you'd expect it to be 47% (45% for income tax and 2% for NI). It's a bit more complicated if the RSUs cause you to cross a tax threshold, or into personal allowance withdrawal territory.

In a sense it doesn't need to be exact - you'll end up paying the right amount of tax either through subsequent months' PAYE, or worst case through self-assessment or the P800 process.

We've seen from other threads that sometimes employers do the calculation overconservatively so you end up having a high withholding from your RSUs, made up for by lower tax in subsequent months, or a year-end rebate. However, where I worked, they always got it very close to correct in the month of vesting.

2.2 More or less - probably minus a bit for brokerage fees when you sell.

2.3 The GBP equivalent of the proceeds of sale (using the FX rate as of when you sell), minus the GBP equivalent value of the RSUs you received when they vested (using the FX rate as of the vest date). You can probably work out the GBP equivalent of what you received using your payslips - they should show (i) the gross GBP value of all your RSUs (including those that were sold for you), and (ii) the GBP value of the RSUs that were sold to pay tax. (i) minus (ii) gives you the GBP value of what you actually received.

2.4 Capital Gains Tax (but note you paid income tax when you vested).

2.5 See https://www.gov.uk/capital-gains-tax/rates.

Briefly you have an £11,700 tax-free capital gains allowance for 2018/19. Any gain above that is taxed at 20%, assuming you're a higher-rate taxpayer.

cac87

Thank you very much @londoninvestor for your feedback, very useful



Any taker for the Stock Options?

EdSwippet

Any taker for the Stock Options?

I'll take a stab.

cac87 wrote: »

A. Stock Options in 2016:
- 1,500 units
- 6.25% vested/quarter (94 units)
- ~1,200 already vested
- Exercise price: $30

Have you already exercised these options at $30, or are they still options (that is, vested but not yet exercised)?

cac87 wrote: »

If we assume that the current share is $100 and I sell now, my questions are:
1. For the Stock Options:
1.1. Will the excercise price be deducted to the share value when I will sell the shares?
($100-$30)*1,200=$84,000
1.2. What type of tax will be applied (Income earning or Capital Gain)?
1.3. Which % of tax will be applied?

If not yet exercised:

• 1.1 Your profit is the current share price less the grant price (your cost). You could exercise and then immediately sell ('same-day exercise and sell') or you could exercise and hold. Either way you pay income tax and NI on the profit, as if PAYE income. So a $84k effective 'bonus' there. Exercise and hold is less common, as you give up the option's intrinsic value for a vague chance at lower tax later when selling; any profit after the exercise is capital gain (or loss) rather than income. The usual safest course is to exercise and immediately sell, then diversify with the proceeds (or spend them!).
• 1.2 Income tax, and NI.
• 1.3 The withholding will be set by your employer, but expect around 50%. For exercise and hold you'd get around half of your options delivered as shares, with the rest taken in tax and NI. For exercise and immediate sell, same but you receive cash rather than shares. Your actual tax and NI liability is as if this were income, so your marginal rates, perhaps 40-60% if a higher rate taxpayer, plus 2% NI. This comes out in the wash either through PAYE or self assessment (or a combination of both).

If already exercised at $30 and then held:

• 1.1 Your profit is the current share price less the exercise price. This is a capital gain (or loss).
• 1.2 Capital gains tax, subject to the £11k or so annual CGT tax-free allowance.
• 1.3 No withholding. Your actual tax liability comes out of completing the CGT part of self assessment at the end of the year.

cac87

Thank you very much EdSwippet


All clear now