Know your options

HMRC are set to make a small but important change to the taxation of share options awarded to internationally mobile employees with effect from 6 April 2015.

Given the concentration of expatriates in the UK, particularly the City, the impact of this for certain individuals could be very significant indeed.  If, however, you will not hold any share options at 6 April 2015, or you have never been awarded share options whilst non-UK tax resident, you may wish to read no further!

Background

By way of context, UK resident employees who exercise share options are generally subject to income tax, unless the employer has put in place some form of UK approved option arrangement.

However, a specific provision in the UK tax legislation tends to remove this income tax charge where an employee exercises options granted whilst they were non-UK tax resident.  This generous provision tends to benefit expatriates returning to the UK from an overseas assignment, and employees coming to work in the UK from overseas for example.

This is set to change from 6 April 2015 under new legislation put forward in Finance Bill 2014, which seeks to impose a UK income charge of some sort in these instances.

Action needed?

Expatriate employees holding share options awarded to them in a period of non-UK residence would therefore be well advised to review their position and consider whether exercising those options before 6 April 2015 may be attractive.  

Clearly, the investment considerations also need to be borne in mind here, particularly if there is a strike price payable, or the share will automatically be sold following the exercise of an option.  The tax position in the prior country of residence would also need some careful attention!

If you are in possession of options granted whilst non-UK resident, we would therefore suggest contacting us to discuss what action (if any) might be appropriate.

The future…

It remains to be seen what form of tax charge may replace the existing exemption, but some form of time-apportionment seems likely in order to bring a proportion of the option gain within UK tax.  This would broadly align the UK tax treatment of options with other forms of equity award, most obviously restricted share awards.

Notwithstanding the above, the UK’s tax regime continues to provide some generous long-standing UK tax breaks for expatriate employees, which have inevitably helped in attracting high-calibre employees to the UK.  

We specialise in maximising the benefits of the UK’s tax rules for internationally mobile employees, and would be happy to discuss these in more detail with those who may stand to benefit from them.