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bigduckontax, Accountant
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I have stock options in my company which is US based and went

Customer Question

I have stock options in my company which is US based and went public 6 months ago on NASDAQ. We were tied into a lock up period for 6 months during which we were unable to sell shares, that lockup period has ended last week and the first trading window during which employees can trade in our stock opens today when NASDAQ trading begins. There are four such windows in the year, the next one in May. What tax liability am I likely to have on these options should I exercise my options today? I presume capital gains tax, is there anything else I should be aware of? My thought was to exercise up to my tax free allowance for capital gains and then in May exercise the rest. Is this the correct course of action to minimise my tax obligations?

 

As an added consideration, when the options were granted they were registered as EMI options, however prior to the IPO the company performed a "reverse stock split" thus giving me less options but more valuable ones, the total value of my options remained the same though. This I am told is potentially disqualifying them from being EMI - my employers are working with HMRC to ensure they remain EMI options, should they not succeed though what would be my likely tax considerations?

 

Thank you.

Submitted: 3 years ago.
Category: Tax
Expert:  bigduckontax replied 3 years ago.
Hello, I'm Keith and happy to help you with your question.

Right, have a look at HMRC Help Sheet 287. It will take you all weekend and you may be none the wiser thereafter! I will in my reply assume that they remain EMI options.

Here is HMRC's advice on the capital gain on the sale of EMI scheme shares:

'If you exercise your EMI option after 9 April 2003, the capital gains cost of your shares is what you pay for them together with the amount charged to Income Tax, if any, on the exercise of your option.'

From your sale proceeds you will be able to work out the gain. Please remember you have an annual allowance of 10.9K of tax free capital gains per tax year.

If the share scheme turns out to be unapproved then the situation changes. Here is HMRC's guidance again:

'If you exercise an unapproved share option after 9 April 2003, the capital gains cost of your shares is the total of:

• what you pay for the option (if anything)

• the price you pay for the shares when you exercise the option, and

• the amount chargeable to Income Tax on the exercise.'

More calculations needed on your part. Without more data I can, of course, go no further. Whichever way you turn CGT looms. Always remember Benjamin Franklin's dictum that in life there are but two certainties, death and taxes.

I hope I have been able to throw some light on your position.
Customer: replied 3 years ago.

Hi Keith,


 


Could you provide a little more detail, I was hoping for an easier to read and understand explanation of the possible tax implications for each scenario.


 


For example;


 


Assuming they are EMI, what is the tax rate? Just CGT due? If so what is the current tax rate? Is that tax charged on the gain made, so total sell price of my options minus the exercise/purchase price?


 


If they are not EMI, what tax is due? Income tax? National insurance? What would those tax rates be? Is it impacted by my current earnings?


 


Finally, a new variable that cropped up whilst reading that guidance. Does a "cashless exercise" make a difference to the applicable tax? I have the option to do a cashless exercise where I exercise and sell my options in one step to avoid having to pay any actual money. Does this change things in terms of tax?


 


I'd found the HMRC website but as I'm sure you get all the time, it made little no sense and I was none the wiser. I realise I'll need to enlist a tax advisor properly at self assessment time more than likely but as a heads up now it helps me decide how best to exercise my options.


 


Thank you.

Expert:  bigduckontax replied 3 years ago.

The rate of CGT is 18% or 28% depending upon your total taxable income. You need to know that first before you can estimate the CGT taxation.

 

If the share scheme is unapproved then there is Income Tax, NI and CGT to pay. Again the rates depend upon your total taxable income. If your are well remunerated you may be over the NI income limit, but be careful here as overpaid NI cannot usually be refunded.

 

I thought you might find the HMRC guidance difficult! Your cashless exercise makes no difference, you are still exercising an option and disposing of shares. However, if you dispose on the day you exercise the option then there will be no gain to tax. If you already have the shares then there is a disposal which may attract a CGT assessment.

bigduckontax and other Tax Specialists are ready to help you
Expert:  bigduckontax replied 3 years ago.
Thank you for your support.