Stock options in US company

Hi everyone,

I'm a dual US/UK citizen, resident in the UK, working for the UK entity of a US based company. When I started my job, I was given stock options in the US parent company. These are not under any sort of UK tax qualified plan.

For US tax purposes, it is pretty clear that when I exercise the options I'll have taxable income equal to the discount I'm getting on the shares compared to fair market value. Would I be able to shield that income from UK taxation using the remittance basis?

The options are granted directly by the US parent company to me without any sort of intermediary, they're managed by Etrade in the US, and my UK employment contract says that the option grant is a separate matter from my employment and is not contractually guaranteed.

I'm guessing that when I exercise, my employer will want to withhold PAYE on the income. I'm wondering if I should argue against that.

There's usually two transactions to consider when exercising stock options.  Firstly, the exercise itself -  the difference between the share price at exercise and the grant price is treated as employment income in both the UK and the US.     Assuming you have been working in the UK throughout the period from grant to exercise, then the whole 'exercise gain' will be subject to UK tax, and your employer will have no choice but to withhold PAYE.

This will also be taxable in the US (as a US citizen) but because you've paid UK tax, you'll be able to claim it as a credit against the US liability, so the US tax should be zero (or close to it). If you've worked some time in the US this becomes a little more complicated.

The second transaction is the sale of the shares subsequent to exercise (if you sell them). The sale of the shares is a capital disposal for UK and US tax purposes, and if you exercise and sell on the same day, then this gain will be nil (or close to it).  If you hold onto the shares, and the value increases, then there will be capital gains tax to pay on the increase between the share price at exercise (on which you have already paid income tax) and the share price at sale.   

If the shares are non-UK shares, and you do not remit the proceeds of the sale to the UK, then this is where the remittance basis may come into play - you can shield the gain on sale from UK CGT.

Thanks for the insight! Very clear description. So your view is that the exercise gain is considered UK source income, despite the contract stating specifically that the UK employment does not create any entitlement to the options?

There's many, many different derivations of stock options plans and subtle changes in the wording can sometimes have an effect,  but yes, it's UK taxable income. I'm no lawyer, but I can't see any way that a stock option exercise could be anything other than by way of employment (whether it is 'from' the US entity or the UK entity is by-the-by) - in which case it would be taxable in the UK if you were UK resident throughout. 

And if your employer has a UK presence for PAYE purposes (which it must have if you have a local employment) then I can't see any way that they can avoid their PAYE obligations.