Share options and internationally mobile employees 

Currently how an employee is taxed on the exercise of their option is dependent on their tax residence position at grant of the option.

If they are non-UK resident at grant, no income tax arises on exercise of their option even if they are UK resident at the time of exercise. On the other hand if an employee is UK resident at grant, he is technically liable to UK income tax on the whole share option gain (the difference between the shares’ market value on exercise and the exercise price) on exercise even if the employee ceases to be UK resident before the option vests of before it is exercised.

This treatment will continue until 6 April 2015. The new measures in the Finance Act 2014 introduce a new approach to taxation where an employee has been internationally mobile during the “relevant period” of an award. The “relevant period” is essentially the period between the grant of an option and when it vests – “vests” means when the option becomes exercisable.

The share option gain is treated as accruing evenly day-by-day across the relevant period with one of the following treatments:-

• Not taxable as it relates to a period of non-residence in the UK in the relevant period where employment duties are wholly overseas; 

• Taxable in full because it relates to a period of residence in the UK; or 

• Taxable to the extent it is remitted to the UK where the share option gain relates to duties performed abroad by a UK resident who is taxable on the remittance basis.

This new approach will have winners and losers. Employees holding vested options that were granted when they were non-resident may wish to exercise them before 6 April 2015 to minimise UK tax bills.

Conversely, employees granted options whilst resident and working in the UK and who are now resident in countries with which the UK does not have a tax treaty e.g. Brazil may wish to delay exercising their option until after 5 April 2015 to gain the benefit of some of their share option gain being apportioned to non-UK periods and so not UK taxable.

 ©Lindsey Sherman and Associates Ltd.  2010: Registered Office Copthorne Farmhouse, Main Street, Great Ouseburn, York. YO26 9RE