Stock options have become a popular form of remuneration used by companies to incentivise employees, especially in the tech sector.
Among the various types of stock options, Restricted Stock Units (RSUs) are particularly popular, but they are subject to taxation in the UK.
If you choose to leave the UK, there is no guarantee that you can leave your RSU tax obligations just as easily.
What are RSUs?
An RSU is a type of restricted share award for employees.
An RSU holder may have restricted voting rights, or it may be contingent to meet certain targets (whether for the company overall or reflecting personal performance) before the shares actually vest.
Unlike traditional stock options, which give employees the right to purchase company stock at a predetermined price, RSUs provide employees with actual shares of the company stock once certain conditions are met, typically after a vesting period.
In the UK, the taxation of RSUs is relatively straightforward for residents.
When RSUs vest, they are typically considered taxable income, which is usually the market value of the shares at the time of vesting.
This income is subject to both Income Tax and National Insurance contributions (NICs).
It is the employer’s responsibility to report this under PAYE.
To settle the Income Tax and NICs, most portfolio managers operate a sell to cover policy.
This is where part of the shares you were granted are sold to immediately at vest to cover the taxes that are due. Otherwise, you would have to settle the tax liability directly with you cash earning (salary).
A sell to cover policy can make managing your RSU taxation a lot easier, as your employer will automatically report the gain via the payroll and no further action will be required from you.
Disposal of RSUs
Once you have acquired the shares, they will be part of your share portfolio and will increase or decrease in value based on the financial marker and when you dispose of the shares.
When you come to sell your shares, you will you need to consider the UK capital gains that may be due on the disposal of the shares.
The gain is not simply the proceeds of sale less the original deemed cost for RSUs.
Under the complex share pooling rules, you need to keep records of all your share grants, vesting, and Income Tax paid on the shares, which will help you calculate the chargeable gain for Capital Gains Tax (CGT).
If your capital gains exceed the annual exempt amount (£3,000), then you be liable for CGT.
Your employer will not have any obligations to support you with the disposal or reporting of the gain to HMRC via your Self Assessment tax return.
The rules are complex and HMRC will not calculate the gain on your behalf. It is important that when declaring the disposal of RSUs and any subsequent gains you have a clear understanding of all your transactions so that the correct UK tax treatment can be applied.
Additionally, if the shares were in a non-sterling currency, make sure you consider the exchange rates carefully.
What happens to RSUs when you leave the UK?
The taxation of RSUs becomes more complex when an individual leaves the UK.
If your RSUs vest while you are still a UK resident, you will be liable to pay UK tax on the entire value of the RSUs, just as any other resident would.
However, things get trickier if your RSUs vest after you’ve left the UK.
In these cases, your UK tax liability is typically calculated based on the number of days you were a UK resident during the vesting period.
For example, if you were a UK resident for half of the vesting period and then moved abroad, you might only be liable for UK tax on half of the RSU value.
The UK has double taxation agreements with many countries, which can help to ensure that you aren’t taxed twice on the same income.
If you sell your shares after leaving the UK, you may still be subject to CGT in the UK, especially if you were a UK resident when the RSUs were granted.
However, your liability will vary depending on the length of time you’ve not been resident in the UK.
Understanding RSUs with Macalvins International
If you have been granted RSUs, it is important to consider what your tax obligations will be in the UK and abroad.
Our international tax experts offer bespoke services to meet your unique business and personal needs.
If you have any questions about RSUs and disposing of your shares tax-efficiently, we’re here to help.
Get in touch with our expert team today for tailored advice and guidance on RSU taxation.