Posted by Nick Day on 18 Feb 2015
Changes to the Taxation of Share Awards for Expats
The UK’s income tax and National Insurance Contributions (NIC) rules for the treatment of an internationally mobile employee (IME) receiving employment related securities (ERS) share awards will change from 6 April 2015.
The current rules for the income tax treatment of ERS received by an IME are complicated and depend on various factors such as the type of ERS instrument used (eg share options, RSUs etc.), whether the award is settled in cash or shares and where the IME was tax resident when the award was granted. Under the new rules the income tax treatment will be much simpler and the ERS will generally be taxed based on the IME’s UK residence and workdays in the earnings period (typically from grant to vest).
From a UK tax perspective there will be winners and losers as a result of the changes. For instance a UK tax resident IME who was granted share options whilst non-resident, which under the current rules would not be subject to UK income tax, will be liable to UK income tax based broadly on the days on which the individual was working or resident in the UK.
Conversely, an IME who was granted a share option whilst UK tax resident, who moves to a country with which the UK does not hold a double tax treaty would under the current rules pay UK income tax on the whole option gain, but under the new rules the IME will only be taxable on the proportion of the gain earned in the UK.
The new NIC rules which are also scheduled to come into effect from 6 April 2015 are currently being finalised. Under the current rules ERS income is charged to NIC on an all-or-nothing basis, with no apportionment. From 6 April 2015 onwards it is intended that the UK NIC charge will be based on the part of the earnings period when the IME is “UK insured” (i.e. subject to UK NIC).
Assuming the NIC rules are implemented as intended, this will mean that income tax and NIC could be calculated on two different apportionments, e.g. if an IME arrived in the UK becoming taxable, but was initially exempt from UK NIC under a social security agreement, 52 week exemption etc., two different calculations of the tax and NIC position would be necessary.
Share Awards for Expats Summary
The new rules will simplify the UK income tax and NIC treatment for internationally mobile employees receiving employment related securities, with the potential for some individuals to benefit and for others to be worse off. In particular, individuals who are currently UK tax resident, who hold share options which were granted before arriving in the UK which have now vested, may wish to consider reviewing the position and possibly exercising the options prior to 6 April 2015 to avoid a potential income tax liability.
The position is complex as there are UK capital gains tax as well as income tax/NIC implications to review.
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