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Where Taxpayers and Advisers Meet

Avoid Income Tax and NI on US stock options/shares in the UK

TSeeker
Posts:5
Joined:Mon May 31, 2021 1:28 pm
Avoid Income Tax and NI on US stock options/shares in the UK

Postby TSeeker » Wed Jun 02, 2021 2:10 am

It's a US based start-up company with no presence in the UK.

In the US, take the following scenario:
  • The company gives the employee stock options: 100 shares each with a strike price of $1 and market price of $1 too. They can be exercised (thus bought from the company) after a year. They can then be sold at various "exit events" at the employee's discretion as they now own the shares fully.
  • The employee "early exercises" the shares on the day they receive the option. So they pay $100 to the company. As far as tax people are concerned, the employee spent $100 and got 100 shares whose total value is $100. So all good, nothing to tax there.
  • After a year the stock options vest and the value per share is $10. So the total value of 100 shares is now $1000. At this point the tax people see this as profit of $900 that the employee has now obtained so in the tax return they will have to file for Capital Gains Tax (which is much lower than Income Tax).
  • The employee may decide to sell it at some "exit event" or anytime if the company is listed in the public stock exchange. They again pay Capital Gains Tax
.

This US company wants to hire me as a remote contractor in the UK. I'm a UK tax resident. So far, I don't know if HMRC recognises this "early exercise" thingy. So scenario for me would be:
  • The company gives the me stock options: 100 shares each with a strike price of $1 and market price of $1 too. They can be exercised (thus bought from the company) after a year. They can then be sold at various "exit events" at the employee's discretion as they now own the shares fully.
  • I can't do much in the UK so no early exercise - the stock options just sit around.
  • After a year the stock options vest and the value per share is $10. So the total value of 100 shares is now $1000. At this point I exercise my options and pay $100 to the company to get 100 shares as they were promised at a strike price of $1 each. The tax people see this as an income of $900 that so in the tax return I will have to pay Income Tax + NI which is way higher - say I'm already in the 45% tax bracket.
  • I may decide to sell it at some "exit event" or anytime if the company is listed in the public stock exchange. I pay Capital Gains Tax assuming there was a profit.
.

So as you can see compared to the US employee, I did not do very well. My questions are:
  • [1] Is there a UK equivalent of the US "early exercise" that I can make use of here ? Note that these are all US stock-options/shares.
  • [2] Is there any alternative that prevents me paying the hefty income tax like there is for the US employee ? Is there anything I can try ask the US company to do that might help me here in the UK with the US-stock options ?
  • [3] I also think that exercising US-stock option in the UK incurs tax in both countries. However there seems to be an agreement between the UK and the US that prevents the US tax people from deducting tax and I only need to pay tax here in the UK. Does anyone know what that is ? I think it might be W-8BEN but any detail would be appreciated.

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