Taxation of equity incentives awarded to internationally mobile employees
From 6 April 2015, the way in which internationally mobile employees are taxed in the UK on employment related share options and restricted shares will change.
The change follows a recommendation made by the Office of Tax Simplification aimed at addressing two perceived anomalies:
- Where an employee was not UK tax resident when share options or restricted shares were awarded, no UK tax is payable under current UK rules at vesting or exercise even if he or she moves to the UK before vesting or exercise.
- Conversely, where an employee was UK tax resident when share options or restricted shares were awarded, UK income tax is fully payable under current rules at vesting or exercise even if employment duties are performed outside the UK before vesting or exercise, although this may be relieved by an applicable double tax agreement.
The new rules create the concept of a “relevant period” (which, typically, is the period between the grant of an option or award and its vesting) which is split between that part during which UK tax is relevant and that part which is outside the scope of UK tax.
The part which is within the UK tax regime will be assessed on a “just and equitable” basis and UK tax will be charged on an amount attributable to the time the individual spent working in the UK.
The new rules will apply to all exercises of share options after 5 April 2015. This treatment differs from that originally announced, under which only awards granted after 1 September 2014 would be affected. There are no “grandfathering” provisions which would continue the current tax treatment to existing options which are exercised after 5 April 2015.
The new rules also provide that any corporation tax relief in respect of share awards should mirror the amount chargeable to income tax.
Employers will need to ensure that payroll systems are able to identify the proportion of awards which will be subject to UK tax.
Award holders will need to decide whether they might benefit from exercising options before 6 April 2015 (if permitted to do so under the rules governing them) in order to secure UK tax treatment or non-UK treatment under the current regime. Any tax advantage in the UK might need to be balanced against any non-UK tax which could be payable as a result of early exercise.
If you or your clients would like to discuss any of the developments mentioned in this newsletter, please contact: