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TonyTax
TonyTax, Tax Consultant
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Experience:  Inc Tax, CGT, Corp Tax, IHT, VAT.
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Looking on tax on stock options granted to UK employee

Resolved Question:

Looking for advice on tax on stock options granted to UK employee by US parent company
Submitted: 2 years ago.
Category: Tax
Expert:  TonyTax replied 2 years ago.
Hi.

Can you tell me what you need to know please.
Customer: replied 2 years ago.

  1. I hold non-qualified stock options issued by our US parent company ( Sourcecode Technology Holdings ) which were issued over a period of the last few years. In total these options amount to a number of 26,302 of which 25,257 are vested as at 31 January 2015.

  2. These options were granted at rates of between 24 and 48 US cents respectively.

  3. On the 4th February, the company entered into an agreement with an investor who purchased series C stock within the company. As a result of this, the company has offered to purchase back up to 80% of our vested options at a net purchase price of $3.35 per share and to pay out the proceeds of this transaction after deducting the strike price of the option.

  4. This message has been conveyed as follows : Sourcecode is offering to buy up to 80% of your vested options as part of this offer at the net proceeds price (base price of $3.51, less the estimated cost per share for the transaction of $0.16-$0.19, less your strike price for the options you are selling). If you participate, your options are sold back to the company directly without exercise – you do not participate in the offer by exercising options and selling the purchased shares.

  5. I would like to know if I have any way of minimizing tax on this transaction , whatever form this tax may be in.

  6. We have also been told that after the closing of this offer/transaction, we will be able to purchase the vested options and convert these into ordinary shares should we not wish to participate in the offer. My understanding is that this will trigger a PAYE gain given that there was a previous investment event but I would like guidance on this.

  7. Taking this offer ( above ) would put me into a position whereby I am in the range of gross pay where the personal allowance is tapered away and will be so entirely depending on what I sell. Is there any way around this besides contributing to a pension?

Expert:  TonyTax replied 2 years ago.
Thanks.

As the scheme is almost certainly an unapproved one as far as HMRC in the UK is concerned as most US stock option schemes are, you will pay income tax and national insurance contributions on the profit you make, albeit that you have been told the options will not be treated as having been exercised.That's the way it would work for a UK scheme and I have no reason to believe that the UK tax treatment will be any different for your US scheme. Take a look under the headings "Will I be taxed if I benefit from my option in any other way" and "Will I pay tax on my option if my company is taken over by another company? here for more information.

As an employee, there is little you can do to reduce your tax liability and mitigate the loss of personal allowance other then pay pension contributions or make charitable donations using gift aid. You may be interested in SEIS (Seed Enterprise Investment Scheme) which gives 50% tax relief or EIS (Enterprise Investment Scheme) which gives 30% tax relief but these are high risk and you have to be prepared to lose youe investment. Look here for information on SEIS and EIS.

Any gains you make from any options you retain will be subject to income tax and national insurance contributions when you exercise them in the normal way assuming they are unapproved options. Some companies do give an option to received options in the new company which would effectively defer any tax liability as no cash would be involved but that appears not to be the case here.

I hope this helps but let me know if you have any further questions.
Customer: replied 2 years ago.

Hi Tony

Thanks for the response, I appreciate the feedback. That does answer some of my questions.

I would like to further query regarding the HMRC Company Share Option plan. How does this operate in practice and do you believe we would be able to set this scheme up now for options that are already vested - for example if we do not take this offer of the option buyback but look to exercise these options after this event. Could we register for this scheme at this stage and benefit from the £30k exemption or would this have to have been done in the beginning when the options were granted and the plan commenced?

Many thanks

Justin

Expert:  TonyTax replied 2 years ago.

I'm afraid that you cannot set up a CSOP to cover existing share options. It has to be done in advance. Making a US scheme UK tax friendly is a complicated process but there are specilaist advisers in the UK who can advise on that. I'm afraid that the horse has bolted in your case.

Customer: replied 2 years ago.

Hi Tony

Thanks again for the advice. This is what I expected but had hoped would not be the case!

One last question on the same topic please - if options are granted in future ( so not currently granted but perhaps to be granted in future under the same scheme ) do you believe there is a way to include these into a CSOP?

Regards

Justin

Expert:  TonyTax replied 2 years ago.
I'm not familair with the nitty gritty of what companies qualify to set up CSOPs but you can find some information here and here.
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