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So, I invest in an employee share scheme. The way I understood it is you put aside some money monthly, at the end of a 6 month period shares are acquired at the beginning or end of the period at 15% less than whichever value is the lower. e.g £100 per share at the beginning means you acquire at £85. Say price goes up 20% over that time, then you've made a gain of 120 - 85 = £35 per share.
What I don't understand is why you'd be taxed on the gain before you actually sell it.
Say I buy 100 shares at £85 per share. The price goes up to £120 per share. The "gain" is £3500. Looks like I'm getting taxed on the gain at PAYE rates which is a sharp sting. I'd expect to pay CGT if I were over the threshold which would be acceptable. At 40% tax that would be a gain of £2100. If you were under the threshold for CGT, then you'd only be 1% worse off. Seeing as this is a long term investment maybe I'd be better off just paying the extra money into an ISA?
I thought ESPP schemes were meant to be a tax perk. Am I missing something here? Should I be able to reclaim tax at some point?
I'm also speaking to payroll to figure this out. But I'd like to hear anyone else's take on this.
>I thought ESPP schemes were meant to be a tax perk.
All depends on the type of scheme, the type of shares (listed / unlisted) and when it was created. They change the rules endlessly.
You'd be better off asking someone in your finance department as they will know the rules and probably picked the best scheme available at the time.
Are you at a start up / private or public listed company?
in either case I believe share schemes are usually built so employees shouldn’t have to pay tax (where necessary) until a liquidity event / the point they sell and realise a gain.
Go straight to you accounts dept and query, if they are unable to help give HMRC a call with details of your payslip / p11d etc and ask them to advise.
Publicly traded company, but RSUs are coming at some point too. So I'll have the joy of paying tax on that when I choose to exercise them.
Cheers. Payroll's answer is you pay tax on the gain at PAYE rate, and that's that.
I guess it's somewhat fair, as you'd have a very low risk of ever making a loss due to the acquisition price.
Now need to figure out the most tax efficient way to get the money back into the country. I think my options are cheque in USD, wire transfer ($25 fee + whatever my bank charges to receive it) and I'm not sure what else. Anybody know?
Still...if I'd put my money in Bitcoin instead right... 😀
Disclaimer - there are a few special schemes out there for start ups and the like and rules can vary if it's UK or foreign company. But essentially...
Your payroll are right OP. There are two tax events with such schemes. The first is when you acquire the shares. The discount you buy them at is taxed as if it were salary. e.g. You buy 100 shares for £850 that would have cost £1000 on the open market; you're taxed as if you'd got £150 extra in your pay packet. If the share price has moved a lot over six months, that gain and tax liability can get bigger. If you can't cover the tax from salary, sell a few shares.
The second tax event is when you sell the shares. You could then be liable for capital gains tax on the increase in value from the market value when you bought them (£1000 in the above example) and the amount you sold them for. You'd have to make a profit of > £11,300 this tax year to be liable for CGT.
Cheers @sturmeyarcher
What's the best way to get dollars out of a brokerage account into the UK? And by best, I mean cheapest 🙂
I may be able to transfer them to a mate's US bank account. Failing that, what would be a better way?
Looks like my options are SWIFT or a currency cheque where they convert the currency for me. Cashing a cheque in USD is a 0.5% charge, so the 1.5% the US bank charge on the rate seems acceptable.
What I can't figure out is if there's a possibility of a charge from the sending bank to mine. All very confusing.
What I don’t understand is why you’d be taxed on the gain before you actually sell it.
It's a benefit in kind, I used to get taxed exactly the same when my employer had pretty much the same scheme (15% discount off the lower of market rate and the offering start date price). You're only paying tax on the delta between your purchase price and the market price at the day of purchase.
Still a great deal!
<span style="color: #444444; background-color: #eeeeee;">What I can’t figure out is if there’s a possibility of a charge from the sending bank to mine. All very confusing.</span>
SWIFT messages can be OUR, BEN or SHA.
Ideally, the sending bank will send "OUR" and any further charges from your (or intermediary) bank will be sent back to them.
If they send BEN, the sending bank will take their charges from the final amount. You (the receiver) pay all the charges.
If they send SHA (which I believe they are now obliged to do since you live in the EU and PSD2 applies) then the sender will pay the sender bank charges, and you will pay any intermediary / your bank charges.
Thanks for a great response! I'm assuming you can send in the foreign currency to a UK bank account and the intermediary will handle the conversion for you before it shows up in your account?
At the end of the day, it's still a form of remuneration, so it should be taxed. Most of us on PAYE would love to be able to get a lump of our earnings tax free in the way that you will get some of this value.
It's not tax free. The amount you "invest" comes out of your net pay. Not your gross pay.
You then pay tax again (PAYE rate) on the gain. Being able to use your CGT allowance on the gain would be nice.
At the end of the day, it’s still a form of remuneration, so it should be taxed. Most of us on PAYE would love to be able to get a lump of our earnings tax free in the way that you will get some of this value.
You've got it wrong.
In the schemes i was in if you kept them for a qualifying period they were tax free. I cannot remember if i got the divi in the qualifying period.
It depends what type of scheme the employer is offering, in the OP's case it doesn't sound like it's one which HMRC deem as one offering tax advantages:
i.e. a nonqualified ESPP scheme from the following link
https://uk.practicallaw.thomsonreuters.com/4-565-1485?transitionType=Default&contextData=(sc.Default)
My former employer offered both a nonqualified ESPP scheme (run out of the US) and a qualified ESPP scheme (run from the UK). The tax advantages if you held the shares for 3-5 years only applied to the qualified scheme.
The most efficient way to get $USD back into the UK is to have a $USD account here in the UK. I have one and use it fairly regularly (I get paid for providing talks etc.. in the US). You get no charges and exchanges pretty much at the FOREX rate. You will probably have to speak nicely to your bank though.
You could setup a borderless account with transferwise.com. I think you could then get the swift payment sent in dollars and then you would transfer the money out in pounds close to forex rates.
Good idea. I’ve used them in the past for transfers and they’ve been pretty good. Didn’t think to look at them this time, but I’ve got more banking to do from the US so I’ll open an account.
you don’t happen to have a referral code do you? 😉
Sent you a link via pm. Not sure it will work if you've used them before or if it is valid for the borderless accounts. Worth a try anyway.
Didn't work this time unfortunately.
I do have another question though.
What happens if the share value falls? Can you reclaim the tax on the gain?
Also, if you sell at a point in the future, will you be on the hook for CGT in case you're over the allowance? Seems a bit unfair. I guess you could offset it by increasing your pension contributions, but that seems like a pretty drastic measure.
I think you are getting confused here between a benefit in kind and a capital gain.
When you buy the shares, the discount you receive is a benefit in kind, as as such is taxed under PAYE.
Once you have purchased the shares, then any further gain is subject to a capital gain. So in your example, you pay $85 per share on a share worth $120, so the Benefit is $35 (as you know). If you hold the share for another 6 months and it goes up to $150 per share, then your gain is $30 per share (as the gain is only against the value of the share when you acquired it, as you have paid tax on the difference).
Regarding getting the money home, most of the large US Brokers will send you a cheque in GBP (and most issue it forms their UK bank accounts, so it's just like any other UK cheque). Once you sell the shares there is a 5 day settlement period (so you get your cash after 5 days), then it usually take 2 or 3 days more to get the cheque (and another week for the cheque to clear to your account)
I've been in US Company share schemes for the last 20 years, so any questions feel free to drop me a message.
Messaged.
What if shares fall in value after you've paid tax on the gain? Can you reclaim the tax already paid?
Also, 2 day settlement period and the wire transfer seemed to reach me right on time.
"What if shares fall in value after you’ve paid tax on the gain? Can you reclaim the tax already paid?"
Why would you be able to do that? I've you've decided to take the risk of keeping the shares rather than selling them straight away then you can't claim the tax back. You would be able to set any capital loss against other capital gains though.
<span style="color: #444444; font-size: 12px; background-color: #eeeeee;">Why would you be able to do that?</span>
Because I've paid tax on an unrealised gain?
You can offset losses against CGT, so it *seems* fair you should be allowed to in this case too.
"Because I’ve paid tax on an unrealised gain?"
I don't think you have. I think you've paid tax on the gain at the time and then the value of the shares has dropped, no different than if you bought shares and the value then fell. If the value of the shares went up, would you expect to pay the additional tax?
If the value of the shares went up and I was liable for CGT when I sold, then yes, I would pay tax right? Meaning I'd pay tax a 3rd time.
But if the value fell and I made a loss when selling, then I'm out of pocket for something I never had.
If I'd bought shares outside the scheme, then I'd only pay tax when I crystallised the gain/loss under CGT. At least, that's my understanding of it.
Either way, it kinda sucks to pay tax twice. Once on the purchase and once on the gain. I guess we pay VAT which is a "double tax" anyway.
No, if the value goes down you can set this loss against other capital gains you may make. Including carrying it forward to set against capital gains in future years (they change the rules on this occasionally so check up if it might be relevant).
The point is that losses are set against gains not against other taxes you might have paid for other reasons.
"If the value of the shares went up and I was liable for CGT when I sold, then yes, I would pay tax right? Meaning I’d pay tax a 3rd time."
No. You'd only pay tax on the gain, not the full amount so it would be the first and only time that you would have paid tax.
"But if the value fell and I made a loss when selling, then I’m out of pocket for something I never had."
Again no because you did have the shares, you just chose not to sell them.
"Either way, it kinda sucks to pay tax twice. Once on the purchase and once on the gain. I guess we pay VAT which is a “double tax” anyway."
And again no. You pay Income Tax on the benefit in kind, you pay CGT on the GAIN you make not the full sale price. If you happen make a loss well that's the gamble that you take by not selling the shares immediately.
The point I was making is that the shares were bought with post income tax income. So you pay tax once, then you pay tax on the gain. If you made a capital gain, then you'd pay tax a 3rd time.
If I'd bought the shares outside the scheme, I'd just pay tax on the gain over the CGT allowance.
The BIK is the 15% "discount" you get on the scheme I guess. Would be fair to pay tax on that. Or are you suggesting the ability to have the lookback is the BIK?
Sure, holding the shares is a risk. But why not tax it when the gain is crytallised in line with how CGT is taxed?
"If I’d bought the shares outside the scheme, I’d just pay tax on the gain over the CGT allowance."
No, if you'd bought the shares normally you'd already have paid the income tax. Granted you wouldn't have paid tax on the benefit in kind but then you wouldn't have had the benefit in kind so you'd be worse off. If you made a gain then you'd pay CGT if applicable.
The scheme as you've described it is a way of buying shares at a known discount that you can then sell immediately to make money. This is a benefit in kind and is taxable as income tax. You don't pay tax 3 times on the same money you pay income tax on the salary, you pay additional income tax on the value of the BIK and you pay CGT as applicable on the gain. These are three separate pots of money.
The BIK doesn't seem to me to be the 15% discount, I would see the BIK as the 15% difference in the share price plus the increase in value of the shares over the 6 month period (or just the 15% discount if the share price fell over that time). Being able to buy shares at the price six months previously is a benefit.
Ok, I think I see where you're going with this.
I'm able to use unearned income to lock in a share price and profit from the decision. Else I'd have to front up the capital and be on the hook for the risk.