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UK fund supermarkets. US Stockbrokers. US international stockbrokers. Cheapest US Stockbrokers. Chris Blundell. View articles. More needs to be done to tackle two fundamental issues that overshadow share options' advantages. Previously employee share options were mainly offered to senior managers as part of their remuneration package, but it has now become common practice to offer this benefit to employees across seniority levels.
Therefore it is important to the 'squeezed middle' that their taxation is fair. But more needs to be done to tackle two fundamental issues that overshadow their advantages to employees. Firstly, a share option is a long-term reward incentive. Its value builds up over several years between when the employee is awarded the option and when they exercise it.
This could easily be fixed if the tax rules were changed so the financial gain on a share option was spread over the life of the option and not taxed as a single bullet-point charge on exercise. She may, however, be liable to UK capital gains tax on any gain realised as a result of selling the shares acquired following the exercise of the option.
This would be so if she is either resident or ordinarily resident in the UK at the date of disposal or if she is within the scope of the temporary non-residents rules contained in Section 10A , TCGA There are special capital gains rules for the tax year she commences UK residence and for the case where she is a non-UK domiciliary. Even though exercise will not normally trigger a UK income tax liability in this case, it may well give rise to a tax charge in another country. Where tax has been paid in a treaty partner country, the OECD view now is that the part of the gain up to the date of exercise should be treated as falling within the provisions of the employment income Article of the relevant double taxation agreement, regardless of the eventual type of tax levied in each country under their domestic rules.
The UK will therefore allow the relevant proportion of the foreign tax paid as a credit against the UK capital gains tax:. The appropriate calculation of relief will be straight-line time apportionment in line with OECD views. There are other situations in which some relief by allocation of taxing rights may be appropriate, for example if the employment ceased shortly before the options were exercised. However there are many permutations possible and it is not possible to deal with all of these in that article.
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Cases that do not fall within the circumstances described will continue to be considered on their own facts and in the light of the new OECD guidance. Previously it has been possible to use methods of apportionment other than the straight-line time method. The HMRC has always maintained that time-apportionment should be the expectation and in practice few cases have been seen claiming another basis — a handful only in the last 3 years.
And in some of those the other country involved agreed to accept straight-line time apportionment after discussions. In the light of the new OECD guidance and international consensus we would not expect to agree cases using any other method of apportionment. Is it necessary for the country of residence to actually tax the gain? The normal expectation would be that tax would actually be levied.
Exchange of information powers may be used to ensure the other country is aware of the option gain so can tax it if their domestic legislation permits.
If the employee is resident and ordinarily resident in the UK both when the option is granted and when it is exercised, can the gain ever be time-apportioned in the UK? Example 4 of TB55 implied that it can. It was meant to reflect that relief by means of credit might be available if the UK recognised that another country had a valid claim to tax part of the gain because it could be said to be derived from employment performed there.
We have reworded Example 4 in this article to make the position clearer. Does it matter whether the option is over shares in an overseas or a UK company? In general, no. The source for double taxation treaty purposes will be the employment, and where it is carried on. Is any relief due on an option gain if an employee were resident in the UK at the date of grant but resident in a non-treaty country at the date of exercise?
If there were overseas tax payable on any part of the share option gain, the UK would consider unilateral relief on a claim. However, unilateral relief is only available to credit overseas tax paid by a UK resident, or a person who is treated as such by section of the Income and Corporation Taxes Act , not by taking any amount out of account by time-apportioning a gain. The amount of unilateral relief may never exceed what would be available if a double taxation treaty with the country existed.
Is it possible to provide guidance on some other important issues, such as periods of residence in a third country, or short-term business visitors now that work at OECD has been completed? E is granted share options on 1 January when he is resident and ordinarily resident in the UK and working here. He goes to country A on 1 January for a year then to country B on 1 January He is still living there on 1 January when the options vest and he exercises immediately. By then he is tax resident in Country B. If Country B taxes option gains on exercise it will have the full right to tax Mr.
E as he is resident there at that time. F is granted share options on 1 January when she is resident and ordinarily resident in the UK and working here. She spends 5 months from 1 January working in country A for her UK employer so that no tax is due in Country A and she remains resident for tax purposes in the UK. She then moves to Country B to work, becomes tax resident there and is still in Country B when the options vest and are exercised on 1 January When the options are exercised the UK is not the country of residence so would confine taxation to the fraction of the gain that is derived from employment in the UK, i.
Mr G is awarded restricted shares on 1 January as part of the bonus scheme for He immediately goes to work in Country A and becomes tax resident there. The restrictions will not lift until 1 January , when he can sell the shares freely. UK IT is due at that date. Although the same principles will apply to other forms of share-based earnings besides options, the underlying facts may mean the result is different. Here the share award derives wholly from employment up to 1 January The period when restrictions on sale are imposed is merely a blocking period.
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The Commentary to this will be expanded to make clear that share options are also within these special rules to the extent that they were granted to a person in their capacity as a member of a Board of Directors. I work for a European multi-national and think therefore that the options I have been granted whilst working in the UK are not American-style ones. This will be a question of fact. European-style options are usually a reward for past service and vest on the day they are awarded even though they cannot be exercised for a given period.
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In such a case time apportionment will not be appropriate unless work was carried out in another country before the date that the options were granted. An employee is resident and ordinarily resident and working in the UK on 1 January On 31 December , he moves to work in Country B where he becomes resident.
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He exercises the option on 1 July and sells the shares immediately.