An employee’s guide to RSUs and Stock Options

More and more employers in the Tech sector are offering Restricted Stock Units (RSUs) or Stock Options to their employees.  These have been popular with US companies for a long time, and so those working for global companies, and those who are working remotely for US/Canadian businesses are finding that they have these as part of their remuneration package.  


So, what are they and what does it mean? 


An RSU is a type of share that carries a restriction. This may be performance based or time based.  


Usually, the shares are Granted – your employer tells you that you are going to get them, then they Vest – you actually get them (when the restrictions are lifted) over a period of time.  The vesting usually takes place over several years, and the shares may vest monthly, quarterly or annually, depending on the scheme your employer offers.


There is no tax at Grant and the shares are usually given to you free. However, you will pay income tax and NIC on the value of the units/shares at the time they vest. Usually, your employer will sell sufficient shares on your behalf to cover the tax bill.


By contrast, if you are granted Options, you will usually need to pay for these, albeit at a lower than market value.  Unlike RSUs, you have the choice as to whether to acquire the shares or not. 


Your employer will Grant you a number of Options at a particular price – often the market value at the point of Grant. In order to get the shares, you will have to Exercise the Options and pay for those you wish to acquire.  You may be able to exercise the Options immediately, or you may have to wait until they Vest. Even then, you may wait to exercise the Options and only do this immediately at the point that you want to sell them.  This may happen upon a floatation or other capital event. There is often a fixed period in which you can exercise your Options. 


Hopefully by the time you exercise the Options, the price of the shares has increased and so you will pay less for the shares than they are worth.  In this scenario, you do not pay any tax at Grant or Vesting, instead, you will pay income tax at the point of Exercise on the difference between the price you paid and the market value at that time.  


In the case of some tax advantaged shares, for example, EMI, the tax treatment will be different.


Then what? 


Once your RSUs vest or you have exercised your Options, you effectively hold shares like any other shares that you might buy. There may be specific times when you can sell these, depending on your employer’s trading window, but in general, it is then your decision to keep the shares or to sell them.  


When you sell the shares, you may have Capital Gains Tax (CGT) to pay.  


If you sell the shares on the same day that you acquire them, then you are unlikely to have any CGT to pay. This is because you will be treated as selling the shares you acquired on that day, and unless the price fluctuates significantly on a single day, you will not have made a taxable gain. 


However, if you retain your shares, even for a short time, then whether you pay tax or not on these will depend on a number of factors – for example, whether you had retained any previous shares that vested/were exercised, what the market value of those shares were on acquisition and what the exchange rate has done (assuming your shares are designated in a currency other than GBP, which most are).  There are complex matching rules that will need to be applied in order to correctly calculate your CGT for UK tax purposes.


Taking advice from both your tax adviser and your financial planner is likely to be highly beneficial so that you understand what the tax you pay will be, and whether there are any opportunities to plan to minimise the tax due. 


You will need to report any capital gains as part of your Self-Assessment tax return and this will not be handled by your employer, so if you do not already prepare a self-assessment tax return, you will need to register with HMRC to do that.  


What next?


RSUs and Options are a very beneficial part of any remuneration package, but it is important to understand the UK tax implications so that you can plan to maximise that benefit.  


At Gravita we have a dedicated team of experts who have been working in the RSU space for a number of years, advising both employees and their employers.  We have developed a bespoke system that enables our clients to plan their taxes around the complex UK tax rules and we have advised clients of every size from large tech giants (Meta, Snap, Amazon, Microsoft etc.) to smaller, Independent companies who are offering UK based employees RSUs for the first time.  


For more advice on how we can help you or your team, please contact Michaela Lamb or the Gravita tax team to arrange an initial chat.

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