For employees that move from country to country, the taxation of benefits in the form of shares is different from the way in which other types of remuneration are taxed in the UK.
This can be a pain to administer and result in significant tax advantages to some employees, whilst others are worse off. The current rules are that if, when a share option or a conditional award of shares is granted, an employee is not UK resident and moving to the UK is not “in contemplation”, then 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 one area in which the playing field should be levelled. In the Finance Act 2014, the tax treatment of shares held by internationally-mobile employees is brought into line with that of their general earnings, along with alignment of National Insurance 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 and tax payable on the amount deemed to relate to working days 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. However, this also allows extra time for tax planning. Employees who hold awards over shares that could fall under the new rules or the old rules would do well to consider whether accelerating or delaying the chargeable event would be best for them.
