Vesting & exercise of share plan awards

Transcription

1 Vesting & exercise of share plan awards The nitty gritty issues 8 October 2015 John Franklin Senior Consultant

2 Typical scenario Paul, an executive director of a UK company (London Stock Exchange main market) has satisfied shareholding guidelines Granted awards Thursday 25 Oct 2012 (3 year vesting periods ending Sunday 25 Oct 2015) to be satisfied by an EBT Paul wants to sell the new shares ASAP so he has sent an exercise notice/sale instruction in advance of the vesting date he knows he will pay income tax/nics but expects no CGT Name of award Type of award Performance link? Recruitment Conditional award/rsu No Deferred Share Bonus Nil exercise price option No LTIP Nil exercise price option Yes Thin market, not possible to sell all the shares on Monday 26 October

3 Do you recognise any of these? We ll process the vesting/exercise on Monday when we are back in the office and treat that as the tax point We won t be transferring the shares until the end of the week so we ll use that as the tax point It s taken 3 days to sell the shares due to a thin market HMRC will still allow us to use sale price as market value

4 or these? We can t get the share sale away on the date of vesting/exercise but it ll only have a marginal effect on the CGT position It s hard to work out exact tax withholding but we have authority to sell shares to cover it so we ll assume a 47% tax rate for everyone The tax point is Sunday potentially good because we can use the lower of Friday s and Monday s price as market value

5 or even these? The exercise form has been received today so we ll treat this as the exercise date it doesn t matter if the sale takes place tomorrow Our post-exercise holding period ends soon a first day sale will keep the CGT simple We haven t had a vesting/exercise for a while aren t PAYE Real Time Information rules going to be a nightmare?

6 Problems relating to when taxable events occur correct valuation of shares for income tax/nic purposes Potential problems PAYE/RTI Capital Gains Tax share identification rules

7 Timing of taxable acquisition events Vesting of conditional award/rsu, exercise of option Unconditional right to shares Even if delay in delivery of shares Possible exception if new issue shares (cannot be acquired until they exist i.e. are allotted)

8 Delaying the tax point Tax point delayed if event conditional upon Evaluation of performance condition Approval to deal Arrangements to fund tax withholding Regulatory consent/approval Terms of option exercise/sale instruction

9 Tax liabilities and withholding obligations Tax liability Amount that individual will ultimately have to pay Withholding obligation Amount that employer has to pay to HMRC May be a mismatch with liability Difficult for administrators to calculate quickly Amount withheld Will often be more than withholding obligation (because actual withholding obligation cannot be calculated easily)

10 Why liability/withholding mismatch? The way PAYE works Cumulative, allowances/bands spread over tax year effect on lumpy benefits : early in tax year 40%/45% withholding even if > liability correction over remainder of tax year Progressive withdrawal of personal allowance 1 for every 2 of income over 100,000 (effective tax rate 60% up to 121,200) For salary may be coded out, otherwise self assessment

11 PAYE withholding steps Calculate withholding without share benefit cumulative pay and tax to date other pay in current month tax code Re-calculate with share benefit added amount of benefit depends on share price price changes in real time Issue can be short-circuited for additional rate taxpayers (withhold 45% + 2% NICs) Other tax-payers more complex what to do?

12 PAYE withholding exact method Ideal, but who by? Administrator doesn t have pay information Payroll doesn t have share price information Rapid calculation needed (real-time share price movement) Holy Grail Payroll provides calculator interrogated by plan administrator Alternatively, administrator has calculator and pulls payroll data In either case, immediate postsale upload to payroll of sale data Special challenges for internationally mobile employees Anyone close?

13 PAYE withholding rough and ready Flat-rate withholding Works for additional rate taxpayers (45% income tax, 2% NICs) Over deduction for others? Not a problem in principle Communication material should be clear Sale authority should cover more than just liability or withholding obligation

14 New valuation rules from 6 April 2015 General position Events on non dealing days HMRC concession Pre 6 April 2015 From 6 April 2015 Lower of: quarter-up - lower of 2 Quotations shown in Stock Exchange Daily Official List (SEDOL) + quarter of difference half way between high and low trades (some exceptions) Lower of value on last and next dealing day Lower of 2 closing prices shown in SEDOL + half of difference Value on last dealing day For sales on date of acquisition or next dealing day, sale price, before expenses (averaged if necessary). For non-dealing day acquisitions, next 2 dealing days can be used Reason for delaying sale, does not matter (can be just administrative convenience)

15 Getting the documentation right Nil exercise price options are more flexible Be explicit when exercises will be effective e.g. Make sure there is proper authority for share sales Include Keep it simple! Date of receipt if a dealing day and before cut-off time Next possible share sale day otherwise But don t allow delay beyond lapse date Selling more shares than required to cover withholding? Selling to an EBT? Don t sell at more than tax market value Dealing consent Clawback consent if not done previously Minimise text better than It is hereby blah blah Emphasise what s important For happy lawyers, put small print in Terms and Conditions

16 PAYE Real Time Information (theory and practice) Does RTI = Really Thorny Issue? General rule information to HRMC not later than payment but taxable amount unpredictable for share benefits Some relaxation in regulations for notional payments (but drafting defective!?) Fortunately HMRC continue pre-rti practice Notional payment can be input on next payroll input day Reasonable excuse will be accepted

17 Leavers (flexing normal 0T rules) 0T tax code different from other codes: Not cumulative Instead, aggregation over same pay period as for normal pay Strictly, all payments should be aggregated HMRC: employers/plan administrators can aggregate separately Assumes no personal allowance, proportion of tax bands May over-deduct/under-deduct (self-assessment adjustment)

18 Internationally mobile employees May be obligation to withhold in more than one jurisdiction Some jurisdictions may require withholding on full amount (individual responsible for dealing with double taxation relief claim)

19 Keeping CGT simple Problems due to share identification rules: then Contribution to base cost Later sales before earlier ones Same day (averaging base cost, if necessary) Next 30 days anti bed and breakfast Pool (averaged base cost) Amount paid amount subject to income tax (+ employer NICs paid by employee)

20 Importance of "same day sales If a delay, shares will be added to pool Cloud : significant CGT bill on sale (if preacquisition pool had low base cost) Silver lining : pool base cost will have risen, so may be less CGT on later sales (possibly not appreciated at the time!)

21 Holding periods and CGT traps Different approaches to withholding: Gentlemen s agreement Restriction on shares Delay vesting of option (but no bad leaver risk) Shares not part of CGT pool while restricted Added to pool when restriction removed No chance for a same day sale Delaying acquisition generally preferable

22 Dealing with "thin markets" Delayed sales may result in CGT liabilities Ensure that acquisition delayed until sale possible Easier with options than conditional awards/rsus

23 Cash-settling awards Seems like a good idea if shares being sold, especially if EBT needs shares for future awards but adverse accounting effect under IFRS2 - if cash-settled rather than equity-settled : charge trued up based on current market value (no reduction if less than grant fair value )

24 Streamlining equity-settlement and sale EBT transfers beneficial interest to participant (shares stay in nominee name) EBT repurchases beneficial interest (shares still in nominee name) SDRT liability on purchase price EBT draws down loan from Company and instructs that payment made to participant Any unsold shares transferred to participant

25 Conclusion Questions? Simples!

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