Capital Gains on share options

Capital Gains on share options

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theboyfold

Original Poster:

10,945 posts

228 months

Sunday 16th February 2014
quotequote all
I'm trying to work out how CGT works on share options that I've been offered through work. And have a couple of questions

  • The HMRC website mentions 'An approved Company Share Option Plan', how do I know if it's approved? We are a US based company and listed on NASDAQ
  • How do I work out my CGT based on some rough figures as to what they might be worth, is it linked to my earnings in anyway? I'm PAYE if that makes any difference.

ellroy

7,099 posts

227 months

Sunday 16th February 2014
quotequote all
Very much depends upon the type of options you have.

They can be totally taxable to income not CGT.

I'd suggest talking to your HR/finance people and get full details which should be easily available.

Eric Mc

122,335 posts

267 months

Sunday 16th February 2014
quotequote all
Exactly. The whole world of share options is a tax minefield. they seem to be very popular with US based companies as a form of paying staff bonuses. From what I can see, many of these US schemes are NOT approved under UK tax law and will therefore be taxable under Income Tax rules rather than Capital Gains Tax rules.

Indeed, if taxable under Income Tax rules, there could even be NI payable on them.

As previously stated, you need to find out EXACTLY what tax rules apply to your particular scheme.

theboyfold

Original Poster:

10,945 posts

228 months

Monday 17th February 2014
quotequote all
Thanks, I didn't think it was going to be a straightforward question to answer. I'll get digging internally to find out what's what.

The Leaper

4,990 posts

208 months

Monday 17th February 2014
quotequote all
Theboyfold,

I was employed in the UK by a USA multinational for 33 years and participated in their Stock Purchase Plan (SPP) and also their Stock Option Plan (SOP). I think you're looking for info for the SOP so I'll concentrate on that.

1. I was granted options on a yearly basis (but not every year!), with the stock price set at the price on the day of the grant.
2. My vesting period was usually 5 years.
3. At the vesting date I had to decide whether to leave the ownership in the SOP for the time being or to exercise the option and purchase the shares at the stock price set at the time of the grant. Obviously, if the price had increased I would be likely to purchase, and I wouldn't if the price had gone down (usually called "under water"). Invariably, even though the price had increased, I would leave the ownership in the SOP and decide to purchase the shares at a later date of my own choosing hoping that the price had risen further...it always did.
4. Once I decided on a date to exercise my option and purchase the stock I needed to pay the cash up front, but what I and everyone else did was to do a combined trade which is to purchase and then sell immediately, meaning that you don't need to come up with the cash and you receive the proceeds of the difference in stock price between the date of the grant and the date of the trade.
5. There was no personal tax liability at all until the SOP was exercised and I purchased the shares. The gross amount realised is considered by HMRC to be income in the tax year of exercise and so the whole lot is subject to tax at your marginal rate.
6. I assume that if you exercised the option, purchased the shares and held on to them, there would be no tax paid at that time, but when eventually sold there would be CGT based on the amount realised by the difference between the stock price at the date of the grant and the price when you sold the shares.

Hope this helps.

R.

theboyfold

Original Poster:

10,945 posts

228 months

Tuesday 18th February 2014
quotequote all
The Leaper said:
Theboyfold,

I was employed in the UK by a USA multinational for 33 years and participated in their Stock Purchase Plan (SPP) and also their Stock Option Plan (SOP). I think you're looking for info for the SOP so I'll concentrate on that.

1. I was granted options on a yearly basis (but not every year!), with the stock price set at the price on the day of the grant.
2. My vesting period was usually 5 years.
3. At the vesting date I had to decide whether to leave the ownership in the SOP for the time being or to exercise the option and purchase the shares at the stock price set at the time of the grant. Obviously, if the price had increased I would be likely to purchase, and I wouldn't if the price had gone down (usually called "under water"). Invariably, even though the price had increased, I would leave the ownership in the SOP and decide to purchase the shares at a later date of my own choosing hoping that the price had risen further...it always did.
4. Once I decided on a date to exercise my option and purchase the stock I needed to pay the cash up front, but what I and everyone else did was to do a combined trade which is to purchase and then sell immediately, meaning that you don't need to come up with the cash and you receive the proceeds of the difference in stock price between the date of the grant and the date of the trade.
5. There was no personal tax liability at all until the SOP was exercised and I purchased the shares. The gross amount realised is considered by HMRC to be income in the tax year of exercise and so the whole lot is subject to tax at your marginal rate.
6. I assume that if you exercised the option, purchased the shares and held on to them, there would be no tax paid at that time, but when eventually sold there would be CGT based on the amount realised by the difference between the stock price at the date of the grant and the price when you sold the shares.

Hope this helps.

R.
That's a brilliant outline, I'll re-read it again tonight and digest it. Thanks!

Eric Mc

122,335 posts

267 months

Tuesday 18th February 2014
quotequote all
Be aware, there were some rule changes in tax year 2011/12 or 2012/13 which could affect the way things are handled.

You need to talk directly with the managers of your particular scheme. Advice given by people with experience of their own particular scheme may be interesting but it could also be misleading - either being due to the scheme being different or the experience being out of date.

The Leaper

4,990 posts

208 months

Tuesday 18th February 2014
quotequote all
Eric is correct, as always. My comments may have been overtaken by changes in UK legislation.

As for seeking tax advice from the managers of a SOP, my experience was that because the shares were in respect of a USA multinational, the managers did not give any advice other than "you must seek advice local to your own country" ie get an appropriately experienced local accountant for specific SOP tax advice, assuming you cannot get information from HMRC's own website and extensive guidance pages.

R.

Eric Mc

122,335 posts

267 months

Tuesday 18th February 2014
quotequote all
I admit that most accountants will only get to the bottom of these schemes when they come across a client who has one to declare on their tax return.

Guess why I had to do some reading up on them a few weeks ago smile

theboyfold

Original Poster:

10,945 posts

228 months

Tuesday 18th February 2014
quotequote all
I understand that every scheme is different, but it's a good starting point to understand the dynamics and mechanics of it all before going much further.