Vesting & exercise of share plan awards

Vesting & exercise of share plan awards

8 October 2015 John Franklin

Senior Consultant

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

“Thin market”, not possible to sell all the shares on Monday 26 October

Name of award Type of award Performance link?

Recruitment Conditional award/RSU No

Deferred Share Bonus Nil exercise price option No

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

…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

…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

We haven’t had a

vesting/exercise for a while – aren’t PAYE Real Time Information rules going to be a nightmare?

Our post-exercise holding period ends soon – a “first day” sale will keep the

Problems relating to…

…when taxable events

occur

…correct valuation of

shares for income

tax/NIC purposes

…PAYE/RTI

… Capital Gains Tax

share identification

rules

Potential

Timing of taxable acquisition events

Unconditional

right to

shares

Vesting of conditional

award/RSU, exercise of option

Even if delay in delivery of shares

Possible exception if new issue shares

(cannot be acquired until they

exist i.e. are allotted)

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

Tax liabilities and withholding obligations

• Amount that individual will ultimately have to pay

Tax liability

• Amount that employer has to pay to HMRC • May be a mismatch with liability

• Difficult for administrators to calculate quickly

Withholding

obligation

• Will often be more than withholding obligation (because actual withholding obligation cannot be calculated easily)

Amount

withheld

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

PAYE withholding steps

• cumulative pay and tax to date

• other pay in current month

• tax code

Calculate

withholding without

share benefit

• amount of benefit depends on

share price

• price changes in real time

Re-calculate with

share benefit added

• Issue can be short-circuited for additional rate taxpayers

(withhold 45% + 2% NICs)

PAYE withholding – exact method

Holy

Grail

Payroll provides calculator “interrogated” by plan

administrator

Alternatively, administrator has calculator and “pulls” payroll data

In either case, immediate post-sale upload to payroll of post-sale data

Special challenges for

internationally mobile employees

Anyone close?

•

Ideal, but who by?

•

Administrator

doesn’t have pay

information

•

Payroll doesn’t

have share price

information

•

Rapid calculation

needed (real-time

share price

PAYE withholding – rough and ready

• Flat-rate withholding

• Works for “additional rate” taxpayers (45% income tax, 2% NICs)

• Not a problem in principle

• Communication material should be clear

• Sale authority should cover more than just

“liability” or “withholding obligation”

Over

deduction for

others?

New valuation rules from 6 April 2015

Pre 6 April 2015 From 6 April 2015

General position

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 2 closing prices shown in SEDOL + half of difference

Events on non dealing days

Lower of value on last and next dealing day

Value on last dealing day

HMRC

concession

• 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

Getting the documentation right

Nil exercise price options are more flexible Be explicit when exercises will be effective e.g. 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 Make sure there is proper authority for share sales Selling more shares than required to cover withholding? Selling to an EBT? Don’t sell at more than tax market value Include Dealing consent Clawback consent if not done previously

Keep it

simple!

Minimise text better than “It is hereby blah blah…” Emphasise what’s important For “happy lawyers”, put “small print “ in Terms and Conditions

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

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

Some jurisdictions may require withholding on full amount (individual

responsible for dealing with double taxation relief claim) May be obligation to withhold in more than one jurisdiction

Keeping CGT simple

Problems due to share “identification” rules:

Later

sales

before

earlier

ones…

…then

Same day (averaging base cost, if necessary) Next 30 days – anti “bed and breakfast” Pool (averaged base cost)

Contribution to

base cost

Amount paid amount subject to income tax (+ employer NICs paid by employee)

Importance of "same day” sales

If a delay, shares will be

added to pool

“Cloud”: significant

CGT bill on sale (if

pre-acquisition 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

Holding periods and CGT traps

Different approaches to withholding:

“Gentlemen’s agreement” Restriction on shares

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 Delay vesting of option (but no “bad leaver” risk)

Dealing with "thin markets"

Delayed sales may

result in CGT

liabilities

Ensure that

acquisition delayed

until sale possible

Easier with options

than conditional

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”)

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

Conclusion

Simples!

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