Share Options are becoming a more popular way of rewarding key staff members as it encourages loyalty whilst incentivising employees to reach targets thus aiding the business.
At Grant
There are a number of key milestones throughout any share option process, and the potential tax implications may differ at each stage:
When the option is granted, under most schemes there are no initial tax implications.
At Vest/Exercise
At the point that the shares are exercised, there is an income tax & NI charge for you (your employer has to pay NI as well!).
This charge is calculated by reference to the market value of the shares at the time of exercise less the amount due to be paid for the shares. The difference between these numbers is subject to tax and NI at your marginal rate and your employer will complete the calculation and make the deduction via the payroll in the month the shares are exercised.
This “income” counts toward the £100,000/£60,000 limits for personal allowance & child benefit restrictions.
At Sale
As and when the shares are sold, the base cost for capital gains tax purposes is the market value at the date of exercise.
Normal capital gains tax rules apply on the sale and you will pay tax at any gain above the annual exemption at either 18% or 28% depending upon your income elsewhere.
Planning Opportunities
At the point of exercise, there are usually three options available as follows:
- Buy the shares outright and pay the tax and NI charge in full.
In this case, the liability is paid to your employer and all of the shares within the company are retained by you.
If and when these shares are sold in the future, they will be subject to Capital Gains Tax and income tax would be due on any dividends paid.
If you have a lower earning spouse, the shares could be transferred in the usual way (subject to any restrictions the employer has put in place).
- Sell enough shares to cover the tax and NI charge and retain the balance of the shares.
In this case, your employer would sell enough shares at the market value and deduct the liabilities before issuing any small balance to you (it is usually impossible to realise the exact amount to cover the liabilities).
The retained shares would be subject to Capital Gains Tax on any future sale and income tax would be due on any dividends paid.
If you have a lower earning spouse, the shares could be transferred in the usual way (subject to any restrictions the employer has put in place).
- Sell all the shares immediately.
In this case, your employer would sell all of the shares and deduct all liabilities before issuing the balance to you.
There would be no Capital Gains Tax implications as the shares would be sold at the same price as purchased. However, they would need to be declared on your tax return.
Finally, please remember that every case is unique and it may also be possible to stagger the exercise of the shares to minimise the tax liabilities and spare any loss of personal allowance/child benefit, so do consider time frames and your current and likely future position before making any decisions.
If you have any queries about Share Options Tax Implications, please contact Karen Robinson (karenrobinson@cullenwealth.co.uk) on 0161 975 6700.
