Employee Share Purchase Plans (ESPPs) capital gains calculation

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Iamyourfriend

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Bonjour amigos,

My company has an ESPP. It's exactly as described here [broken link removed]

Basically I can get shares at a 15% discount (and I pay income tax on this benefit).
If I sell the shares, is my cost basis for calculating the capital gain the share price at time of purchase, or the share price at time of purchase minus 15%?

-Iamyourfriend

Edit: I'm currently maxing out my AVCs contribution limits, does this affect this, either by pushing my contribution higher (if this counts as an equivalent contribution) or lower (this benefit becomes part of my total remuneration right?)?
 
Your cost price is the share price at time of purchase. You've already paid for 85% of it out of taxed income and then paid income tax on 15% discount.
 
dublin67 said:
Your cost price is the share price at time of purchase. You've already paid for 85% of it out of taxed income and then paid income tax on 15% discount.
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When do you pay the income tax on teh 15% discount? When you sell the shares? Are all deductions through PAYE?
 
Tax on the 15% discount is typically deducted through payroll. In some rare cases ESPPs are regarded as share options and then tax should be paid through the RTSO system. If it is deducted through payroll then the only tax you should be looking at is CGT on disposal (when you a gain). If not you'll need to pay tax through RTSO and file a tax return for the relevant year.
 
I've only started participating this year, but my company warned us you have only 30 days after purchase to pay the tax on the gain (i.e. the 15% discount) and it's treated as standard income
 
Just to be clear income tax + prsi + usc is due on the entire gain at the end of the purchase period - not just the 15%.

E.G shares at start of period = 10
shares at end = 20

Shares are bought at 85% of share price at start = 8.50

tax+usc+prsi is paid on 20 - 8.50 = 11.50 (not just the 1.50 discount)

Revenue ignore currency costs and other selling costs.

If the share price falls before the shares are available in your account to sell (typically a couple days), then you still pay the tax on the price the shares were at end of period.

Revenue's changes to tax several years ago (adding PRSI and USC)has made ESPPs less of a no-brainer. I now automatically pull out if the share price hasn't risen. The 15% discount - alone- isn't worth the hassle after 52% tax, charges, risk of share price drop wiping out remaining profit, and form filling.
 
Iamyourfriend said:
I've only started participating this year, but my company warned us you have only 30 days after purchase to pay the tax on the gain (i.e. the 15% discount) and it's treated as standard income
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Okay that means that your employer is not operating PAYE on the discount. Accordingly, you'll need to pay it yourself through the RTSO system. Look at this on the Revenue website and you can see how to do it. You'll pay 52% on the 15% discount and this will be done through the RTSO system. I think you can do it through 'Mytax' or something like that. The back of the Form RTSO1 has all the details.
 
ashambles said:
Just to be clear income tax + prsi + usc is due on the entire gain at the end of the purchase period - not just the 15%.

E.G shares at start of period = 10
shares at end = 20

Shares are bought at 85% of share price at start = 8.50

tax+usc+prsi is paid on 20 - 8.50 = 11.50 (not just the 1.50 discount)

Revenue ignore currency costs and other selling costs.

If the share price falls before the shares are available in your account to sell (typically a couple days), then you still pay the tax on the price the shares were at end of period.

Revenue's changes to tax several years ago (adding PRSI and USC)has made ESPPs less of a no-brainer. I now automatically pull out if the share price hasn't risen. The 15% discount - alone- isn't worth the hassle after 52% tax, charges, risk of share price drop wiping out remaining profit, and form filling.
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This is not correct. The employee saves up for the shares and pays 85% of the value. Accordingly only the 15% discount is taxable as you have paid for the other 85% of the shares value from your net salary.
 
dublin67 said:
This is not correct. The employee saves up for the shares and pays 85% of the value. Accordingly only the 15% discount is taxable as you have paid for the other 85% of the shares value from your net salary.
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If the employee simply paid 85% of the current price you'd be correct, however in ESPPs the employee pays 85% of the lower of the start or end price.

There's two parts to the discount
1) the 15%
2) being able to buy at the start price if it was lower

From [broken link removed]:

Income Tax
The discount allowed by the company is chargeable to Income Tax as a benefit derived from your employment.
The amount chargeable is the difference between the:
market value of the shares when they are purchased on your behalf
amount you pay for those shares.

I.E in my example the shares had gone from 10 to 20.
The market value is 20, the amount you pay per share is 8.50. The amount chargeable is 11.50. Is it possible to read Revenues instructions any other way?

Incidentally our accountancy firm has confirmed this is how the taxation has to be calculated.
 
Even more definitive from Revenue -


4.1 General In addition to share option schemes many companies, particularly subsidiaries or branches of US corporations, also operate Employee Share Purchase Plans (ESPP). An Employee Share Purchase Plan enables the employees of the company to purchase shares in the company or its parent company at a discount, through deductions from the employee’s net salary or wages. The discount allowed is normally 15% of the market value of the shares on either the first or last day of the offer period, whichever is the lower. The offer period is normally six months. Example Shares are trading at USD 65 at the beginning of the six month offer period on the Stock Exchange and trading at USD 72 at the end of the six month offer period. The shares can be purchased USD 55.25 per share (i.e. USD 65 * 85%). The amount charged to income tax will be USD 72 less USD 55.25 per share. In this instance the amount charged to income tax is more than 15% of the market value of the shares at the date of purchase
 
Coldwarrior said:
Not all ESPPs have this option, but for the ones that do I believe you're correct.
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The option to buy at the start is the sole reason ESPPs have been lumbered into the RTSO (relevant tax on share option) scheme - they're a type of share option.

The OP mentioned the scheme as being exactly as described on Revenue's site. And if so has the option to buy at the start of period.

If a company had a scheme to save and buy shares at a discount (without the ability to buy at the scheme start price), that sounds like it should fall under more general BIK rather than ESPP and RTSO territory. It's definitely not a type of share option.
 
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ashambles said:
The option to buy at the start is the sole reason ESPPs have been lumbered into the RTSO (relevant tax on share option) scheme - they're a type of share option.

The OP mentioned the scheme as being exactly as described on Revenue's site. And if so has the option to buy at the start of period.

If a company had a scheme to save and buy shares at a discount, that sound like it should fall under more general BIK rather than ESPP and RTSO territory. It's definitely not a type of share option.
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We have such a scheme and revenue consider it a type of share option and apply RTSO. Tax is paid on the difference between the discounted purchase price and the market price at the end of the 6 month cycle.
If you keep the shares and subsequently sell, any additional gain is subject to CGT.
 
losttheplot said:
We have such a scheme and revenue consider it a type of share option and apply RTSO. Tax is paid on the difference between the discounted purchase price and the market price at the end of the 6 month cycle.
If you keep the shares and subsequently sell, any additional gain is subject to CGT.
Click to expand...

Same here, the tax isn't handled by payroll we have to fill out an RTSO form and pay it ourselves.
 
Some great information here. I personally haven't seen the price at the start of the option period being used but if it was I would totally agree Ashambles here re the taxation of ESPPs when the price is set at the start of the period.

I've had reason to go the mechanics of these ESPPs in some details and it is my view that PAYE should in most cases be applied. The precise reason is that in all the plans I have reviewed the option exercises automatically on month 6 (normally) when you join the scheme. The employee doesn't exercise an option, as such, as they would with a share option. I have, however, obtained a ruling from the Revenue that RTSO should apply and I would consider that it is incorrect in that instance.

It imposes an unnecessary burden, in my view, on employees if they have to pay tax via RTSO and file a Form 11. Once RTSO applies the employee is a chargeable person and required to file a Form 11 and, in most cases, electronically.
 
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