The UK tax treatment of employment related securities depends on a range of factors including the date of grant, the nature of the security and also the residence and domicile status of the employee. For employees coming to the UK who are not UK resident at the time of grant, the tax treatment will depend on whether the awards include an option.
Currently, when a share option or a conditional award of shares is granted, if the employee is not UK resident and moving to the UK is not “in contemplation” (thus the award is not in respect of UK duties), there will be no UK tax to pay when the option is exercised or the award vests, even if the employee moves to the UK long before exercise or vesting occurs.
The Office of Tax Simplification identified this as an area in which the playing field should be levelled. In the Finance Act 2014, the tax treatment of shares held by internationally-mobile employees was brought into line with that of their general earnings, along with alignment of national insurance (we await further guidance on this) and corporation tax relief.
The new rules apply to any “chargeable event” (essentially exercise or vesting) that occurs on or after 6 April 2015, regardless of when the award was made or where the employee worked at the time. If the employee works in the UK at any time during the “relevant period” – the time between the grant of the award and exercise or vesting – income arising on the chargeable event will be apportioned across the relevant period. UK tax will be charged on the amount deemed to relate to time spent in the UK. So, for example, if an employee works in the UK for the first year after the grant of an option and then moves abroad for the next two years, exercising the option on the third anniversary of grant, under the new rules the employee will pay UK income tax on one third of the option gain.
The effective date for these new rules was put back from 1 September 2014 to 6 April 2015, to give companies more time to make the necessary arrangements – but have you done this? And do your employee share plans provide for who will pick up any unforeseen tax charge? Is there the possibility of a double tax charge or double tax relief? What are the PAYE and RTI implications? There are a lot of questions to be answered so make sure you reach out to your Squire Patton Boggs contact and get ready for April.