Capital gains tax on share related pay
Written by Ray Coman
Often employees receive share related pay from their job. Share options give staff an opportunity to purchase copmany shares for a set price in the future. A Restricted Stock Unit or RSU is an award of shares in the future. When the share or share option vests, it causes a taxable event.
Capital gains tax arising on subsequent disposal
Share based remuneration from overseas employment
Tax position on granting
The granting date is the date on which the employee becomes entitles to receive the share or share option. There is no tax as a result of obtaining an entitlement, only on the subsequent receipt of shares. The difference between what the shares are worth and what the employee paid for them will be taxed on eventual vesting. If the shares were granted at a discount, and this discount eventually benefits the employee the element of discount would be part of what is taxed on the vesting date. There is no stamp duty on granting of the option.
PAYE tax arising on vesting
Vesting occurs when the share or share option gets owned by the employee. The award of an employment related security is often conditional. A typical condition is that the share is not awarded to an employee that has left before the vest date. The value of what is received is treated as taxable employment earnings on the vesting date. In the case of an RSU, the entire share value is taxable, and in the case of an option the amount payable by the employee is deducted from what is treated as earnings.
For a listed company, an RSU is regarded as a readily convertible asset. Share related pay from a listed company is so liquid that the tax system treats them as though the award were for cash. Therefore, readily convertible assets are subject to both tax and national insurance.
Shares in an unquoted company, such as a start up or family run business, are not readily convertible. This is because there is no ready market for the sale of the shares, and any gain could be difficult to realise. For instance, the only buyers could be a relatively small group of company directors who have the power to artificially depress share price.
In a listed company, tax arising on the vesting of shares in the company is processed through payroll. Typically, sufficient shares are sold to cover any tax liability arising on the sale. Therefore, on the vest date, the employee will see shares included in the payslip, but take home pay is not affected.
For an shares in an unquoted company, any income tax from vesting is reported on a Tax Return. Special rules apply to tax advantaged schemes, one of the more common of which -for small businesses- is Enterprise Management Incentive. An employee will typically be informed by their employer if the share is part of a scheme which benefits from preferential tax treatment.
The broker will calculate any UK stamp duty payable on exercise. Any stamp duty, broker fees and other transaction costs of purchase can be deducted from the taxable gain on subsequent disposal.
Capital gains tax arising on subsequent disposal
The employee usually has the choice to instruct the broker to sell the remaining shares and realise their award immediately in cash. If the shares are not sold when they vest, a potential capital gains tax liability arises. The market value of the shares on the vest date (i.e. the amount processed through payroll) establishes the base cost for capital gains tax purposes. Any subsequent increase in value would be subject to capital gains. If the shares are sold in the future for less than the price on the vest date, a capital loss would occur.
Share based remuneration from overseas employment
Share remuneration will not be taxable in the UK where related to employment duties performed outside the UK (whilst the taxpayer was not resident.) That applies even if the taxpayer is resident when the shares were received. Gain on vesting is therefore reduced by the extent that it relates to overseas workdays. Workdays spent overseas as a portion of total workdays between grant date and vest date establishes the extent to which the overseas remuneration is not taxable in the UK.
