From 6 April 2015 (the start of the UK tax year), the UK taxation and social security contribution treatment of share option gains and other employee share awards is changing. The new treatment applies regardless of when options or other awards were made and so in effect the change is retrospective and affects options and awards already granted. The main impact is for employees who were not UK resident at the time they received their award or options.
The current position is that the UK tax treatment of employee share options and other share awards principally depends on the residence position at the time of the award. If the employee is UK resident (or shortly to become UK resident) at that time, the entire gain on exercise or vesting is capable of being subject to UK income taxation. However, if the employee was not resident, no UK taxation is payable on exercise or vesting.
Position from April 2015
Rather than look to the position at the time of the award, the legislation will look at the position over the entire vesting period. Employees who exercise options or receive shares and who have in the vesting period been non-UK resident will generally be taxed on the basis of UK duties/time spent in the UK in the period between receiving the award and the award vesting. A similar approach will apply where they have been resident but have limited ties with the UK and so are only taxed where they are taxed if the relevant part of the gain is brought into the UK (the so-called “remittance basis”). The relevant amount of the gain will normally be worked out on a time-apportioned basis. The tax treatment of options etc will therefore be aligned with the taxation of cash bonuses which are earned over several years.
While this may be conceptually fairer than an “all or nothing approach”, this is a major structural overhaul of the taxation regime in this area and companies with internationally mobile employees need to recognise the coming change. Since the changes are retrospective, someone who has come to the UK since being granted an option would in principle be worse off in UK tax terms if he exercises his option on or after 6 April 15 (when the time spent in the UK since the grant of the option would lead to a time-apportioned gain being taxable) as opposed to before 6 April 15 when the option gain would not be subject to tax at all. Equally, some who have left the UK might be better off delaying exercise or vesting until on or after 6 April 2015.
However, the basic position is made more complicated by the effect of double treaty relief and so each case needs to be looked at separately.
The UK NIC (social security contribution) position is also changing in April 2015 (at the same time as the income tax changes take effect). Currently, neither NIC legislation nor relevant international agreements allow for any apportionment of share gains - either the entire amount is subject to NICs or the entire amount is free of NICs. The new NIC legislative regime has only recently been announced. It will also operate on a time apportionment basis, but using a slightly different method - it will work by treating the relevant gain as accruing on a daily basis over the same vesting period as is used for income tax purposes but only levying NICs on amounts relevant to days when the employee was within the UK NIC net.
No changes are proposed here, though to the extent that any gain is subject to income tax, relief against taxation as a capital gain would normally be available.