Restricted Stock Units, better known as RSUs, are an increasingly popular form of incentivisation offered to employees. These are a kind of employee share option scheme and are most commonly being offered by multinational tech companies, but are also offered by some banks and other smaller companies, albeit sometimes under a different name.
An RSU is a type of share that may be restricted for some reason – for example, it may not have any voting rights when granted or be contingent on certain targets being met before the shares actually vest.
There are various occasions when RSUs may attract taxes in the UK (when owned by someone who is UK tax resident) and reporting the taxation which is not handled by the employer can be a minefield, especially if shares have been held for a while before being sold.
The position becomes more complex still if the employee has received RSUs when working for the same company overseas, either before or after being UK tax resident.
Acquiring RSUs
RSUs are not taxable when they are granted. The first time that they are exposed to tax is upon vesting, at which time both income tax and NIC are due. Employers will usually deal with this under PAYE and so, if you are the recipient of some RSUs, initially there is nothing you need to do to make that happen.
In order to pay the tax that is due, most schemes are arranged so that your employer will sell enough of your shares that vest to cover the taxes due at that point, rather than take it out of your salary. In most cases, this will include the employer’s NIC as well as employee’s NIC, and you will be asked to enter into a joint election with your employer so that you take responsibility for this. This election is beneficial because it gives your employer certainty over the amount of NIC due and as the recipient, you will be entitled to income tax relief for this which your employer should calculate when working out how much PAYE is due on the shares. Most employers handle this process and there is not usually any Capital Gains Tax to pay at this point.
If you have previously worked overseas and were granted RSUs prior to coming to the UK, then how much tax is due in the UK may be more complicated to calculate, and you may find that you over pay your taxes in the UK and could be due a refund. Similarly, if you relocate overseas and continue to receive RSUs, you may have an ongoing UK tax liability on these.
Even if you are in the UK and always have been, depending on the location of the issuing company, you may find that you are subject to foreign tax deductions, but you may not actually owe taxes overseas.
Selling RSUs
The next time you need to consider UK taxes is if you come to sell the shares that you now hold. At this point, if the value of the shares has increased above the value you were deemed to acquire them at then you will have a taxable gain, and if this exceeds your available annual exemption (currently £12,300) then there will be tax to pay on the gain. The gain is simply the proceeds less the original deemed cost. Simple? Sadly, not necessarily so with RSUs. And even worse, your employer probably will not help you to deal with the tax this time.
Because the shares are acquired at different times, when you come to dispose of them it is necessary to apply strict matching rules to work out which shares have been sold for tax purposes, so you know what base cost is for calculating the taxable gain. Because the shares will have had various different values at the time each tranche was acquired, there will, in theory, be a number of different base costs, and if the shares were in a non-sterling currency, even in the unlikely case of each tranche having an identical values, there will be exchange rates to consider.
Some countries match shares on a first in first out basis – for example the US – and that may be how the sale is reported in the annual statement prepared by your broker. However, in the UK the shares will usually need to be “pooled” with an average cost per share calculated. But not always – for example, if you sell shares and then acquire more within the next 30 days, you will be deemed to have sold shares you have not even acquired at the time of the sale first! In either case, using the figures as matched by the broker statement may give you the wrong numbers for UK tax purposes so relying on those might leave you with the wrong tax bill.
The rules are complicated and HMRC’s software is not designed to deal with this sort of complexity. It is therefore really important that when declaring gains on these kind of disposals that you understand what numbers and what exchange rates need to be used. The key is to keep records from day one so that nothing is missed.
Gravita acts for many clients who have RSUs and we keep strict records on behalf of our clients that can be maintained each year at the same time the tax return is done, or more regularly if required. This means that we can calculate expected CGT at any time, if you want to understand what tax might be due in advance of a sale.
What next?
If you would like more information or assistance with how best to record and report RSUs please contact Michaela Lamb.
You can also watch our video on Frequently Asked Questions regarding RSUs below and read the full article here.
