ESPP Scheme - Income Tax

[markj8486]

Hi,

I have an 15% discount ESPP scheme through work and have to fill out an RTSO1 form at the end of every offering period as my employer has permission from Revenue to not process Tax, PRSI and USC on the BIK through the payroll.

I have been told by a broker that if I hold on to the shares for 3 years then Income Tax is not due, however I cannot find any documentation to support this.

It is my understanding that Income Tax, PRSI and USC will always be due on the difference between what I paid for the shares and the value of the shares when they were purchased.

Then CGT of 33% will be due when I sell the shares, minus the personal exemption of €1,270, and this CGT is calculated on the difference between the value of the shares when I purchased them and when I sell them.

If there is any way to help reduce any kind of taxation by holding on to share longer then I would love to know, I just don't believe this to be the case for ESPP. I can only find information on an income tax exemption relating to Employee Share Incentive Schemes which I believe are different to ESPP schemes, see info below from KPMG. Maybe he is getting confused with this. I see on KPMG website it says under an APSS scheme shares are held in a trust for minimum of two years. After that time the members may dispose of them but may be subject to income tax. Shares held for three years may be sold free of income tax, USC and PRSI, however CGT may apply

Thanks,

Mark

 

[ginslia]

I think your broker has confused the two schemes. USC & PRSI are due in either case (approved or unapproved share schemes).

Approved share incentive schemes - employees buy shares today out of gross income at market value (no discount) and they are held in trust for 3 years - so when they revert to the employees name in 3 years time - there is no gain (as full price paid), could even be a loss at this stage. The income tax is saved by holding for 3yrs. If the employee sells early, then the income tax is clawed back.
The EPSS is unapproved, you are saving a fixed amount out of net tax income (already paid income tax on this money) at a small discount, with some conditions attached (%salary etc) and shares are purchased in the future, when a gain arises subject to tax. (if the price had fallen below the discount - you could probably get your money back with no tax implication).

If it was possible to save the income tax by holding EPSS for 3yrs, then the unapproved scheme would be more beneficial than the approved scheme because of the discount! The term of the scheme (6m v 3yrs) and the market the share is traded on (Irish stock exchange or not) seem to be important factors on whether it is approved for income tax exemption or not.

If you sell the same day the shares are bought - the CGT is minimal. You still make a gain from the 15% discount * after tax rate.

 

[markj8486]

Thanks, that is exactly what I thought!! Yep, could sell immediately so little or no CGT as am selling as the value at sale is the same price as value at purchase. Then all I have to pay is the Tax, PRSI and USC on the difference between what I paid for the shares and the value of the shares when they were purchased as that is classed as a benefit in kind.

 

[ashambles]

Thanks, that is exactly what I thought!! Yep, could sell immediately so little or no CGT as am selling as the value at sale is the same price as value at purchase. Then all I have to pay is the Tax, PRSI and USC on the difference between what I paid for the shares and the value of the shares when they were purchased as that is classed as a benefit in kind.

Are you sure you can sell immediately, some of these schemes you're waiting a couple days for the shares to be ready to sell. If if there's an official buy and sell option - that helps as it probably will be at least same day - if not same time.

After tax you're only making around 7% profit, then you've transaction costs that could be up to 100$ which revenue do not consider.

Your profit after tax and costs might only end up at 3-5% which could all be lost if the share price dips before the earliest point you can actually sell.

Not sure about with Irish taxation if it's worth buying shares in an ESPP if the gross profit looks like it's only going to be close to 15%.

 

[fungie20]

Not sure about with Irish taxation if it's worth buying shares in an ESPP if the gross profit looks like it's only going to be close to 15%.

From my experience of ESPP, you would be mad not to do them if you can do without the cash for the 6/12 months. I can put a sell order immediately, so it's a no brainer. What other investment offers a risk free, minimum gain of 17.6% over that timeframe? That assumes the share price drops or stays identical, if it rises, you can have a far higher gain!

Yes, the tax sucks but it's no different than any other income, so you just gotta suck it up.

 

[Coldwarrior]

Your profit after tax and costs might only end up at 3-5% which could all be lost if the share price dips before the earliest point you can actually sell.

Not sure about with Irish taxation if it's worth buying shares in an ESPP if the gross profit looks like it's only going to be close to 15%.

3-5% net is a lot better than you'll get in a savings account, and pretty good for a relatively low risk investment.

 

[ashambles]

3-5% net is a lot better than you'll get in a savings account, and pretty good for a relatively low risk investment.

Certainly is - and if you wanted to put it on an annual basis you could say it's 6-10%.
When the price at the end is higher than the start - you're doing very well. If the buy and sale are handled for you and are done same day that's great.

But when Revenue increased taxation on these from 40% to 50% that made the scheme less attractive where the profit is 15%.

In an ESPP typically there's restrictions like up to 10% of your salary. Transaction charges however are usually at least partly fixed charges, so not trivial in comparison to the investment profit on the sums of money involved.

An example might be someone on 60k putting in 3k over 6 months. If the profit is 15% that's 450e.

That's about 225 after tax. Maybe around 125 in profit or so after typical charges and conversions (assuming dollar based).

For that 125, you've got to send a cheque for 225 and an RTSO form within 30 days, then you've got to fill in the same information again next year in the Form 11.

There were times I made a loss or a few 10s of euro profit, because that same day sale wasn't always part of my ESPPs. The tax hassle was definitely not worth the effort in those cases - so eventually I would always take the option to pull out of the scheme a few weeks before the end of period if it was clear the end price would not exceed the start price.

 

[fungie20]

Certainly is - and if you wanted to put it on an annual basis you could say it's 6-10%.
When the price at the end is higher than the start - you're doing very well. If the buy and sale are handled for you and are done same day that's great.

But when Revenue increased taxation on these from 40% to 50% that made the scheme less attractive where the profit is 15%.

In an ESPP typically there's restrictions like up to 10% of your salary. Transaction charges however are usually at least partly fixed charges, so not trivial in comparison to the investment profit on the sums of money involved.

An example might be someone on 60k putting in 3k over 6 months. If the profit is 15% that's 450e.

That's about 225 after tax. Maybe around 125 in profit or so after typical charges and conversions (assuming dollar based).

For that 125, you've got to send a cheque for 225 and an RTSO form within 30 days, then you've got to fill in the same information again next year in the Form 11.

There were times I made a loss or a few 10s of euro profit, because that same day sale wasn't always part of my ESPPs. The tax hassle was definitely not worth the effort in those cases - so eventually I would always take the option to pull out of the scheme a few weeks before the end of period if it was clear the end price would not exceed the start price.

I done this last month, real world example:

Gain: $1078 (891 eur)
Gross gain %: 17.6% (share price dropped)
Fees & commission: $20 (16.5 eur)
Wire fee: $25 (would of been zero if you have US bank account, I've since got one) (20.5 eur)
Currency conversion: 24 eur
Tax: 463 eur (52%)
Net gain: 367 eur
Net gain %: 7.3%
It took 5 mins to fill out RTS01 and email to revenue and pay tax online.

So in 6 months I made a net return of 7.3%, this was the worst result that could come from this since share price dropped and had to pay wire transfer fee. What investment offers a return that high, in such a short amount of time with no risk (in theory, company could go bust, but unlikely. Also I think the money is kept in escrow, so not sure what would actually happen in this case)

You are grossly overestimating the charges associated with it. Also the 'profit' isn't 15% as stated, minimum gain is 17.6% on your capital.

 

[losttheplot]

The 15% discount in our employee scheme is calculated from the price at the start or end of the cycle. So 15% will always be the minimum discount.

 

[fungie20]

I do have one question though, since this is essentially a BIK and you pay income tax, PRSI and USC, can you use the amount earned to increase your AVC amount? i.e. your overall taxable gross income has increased.

 

[ashambles]

I done this last month, real world example:

Gain: $1078 (891 eur)
Gross gain %: 17.6% (share price dropped)
Fees & commission: $20 (16.5 eur)
Wire fee: $25 (would of been zero if you have US bank account, I've since got one) (20.5 eur)
Currency conversion: 24 eur
Tax: 463 eur (52%)
Net gain: 367 eur
Net gain %: 7.3%
It took 5 mins to fill out RTS01 and email to revenue and pay tax online.

So in 6 months I made a net return of 7.3%, this was the worst result that could come from this since share price dropped and had to pay wire transfer fee. What investment offers a return that high, in such a short amount of time with no risk (in theory, company could go bust, but unlikely. Also I think the money is kept in escrow, so not sure what would actually happen in this case)

You are grossly overestimating the charges associated with it. Also the 'profit' isn't 15% as stated, minimum gain is 17.6% on your capital.

I also done this last month.

On a 7000 dollar transaction you've done well to get it lodged with only a loss to you of 24 euro. Many ESPP owners want to lodge it to their AIB/BOI etc. account and they'll be paying more than 24 euro (closer to 1% for sums like this - but gets less when it's over 10k, 20k etc.)

Revenue want their taxes calculated based on the interbank rate on the day you got the shares, not the rate the bank gave to people. Bad as the Irish banks are for currencies they've tended to be cheaper than what the US brokerage would charge for converting it before sending it.

That 45$ wire + selling fee is a decent deal your company has organized - it's not going to be as cheap everywhere.

The way the 15% works is if you invest 1000 into your ESPP you buy 1150 dollars worth of shares for 1000.
I assume you're working it as getting 1000 of shares for 850 as that would be 17.6.
But for that you'd be getting 150 of your 1000 back plus your shares and the profit would still be 15% on the 1000 you'd invested over the 6 months.

 

[_OkGo_]

The way the 15% works is if you invest 1000 into your ESPP you buy 1150 dollars worth of shares for 1000.
I assume you're working it as getting 1000 of shares for 850 as that would be 17.6.
But for that you'd be getting 150 of your 1000 back plus your shares and the profit would still be 15% on the 1000 you'd invested over the 6 months.

This is wrong, Fungie20 has worked it out correctly. It doesn't matter what the exact $/€ figures are. If you are buying at a 15% discount, this is always a 17.6% gain on your capital.

As for your earlier example of €3k invested in ESPP. At the end of the cycle, you have €3k to buy discounted shares. If they are €10 FMV, you buy them at €8.50 (15% discount). Your will receive 352 shares at €8.50 (€2992). The leftover €8 usually just goes into your next cycle. So you have now bought €3520 worth of shares for €2992 or in other words, you have a 17.64% gain on your investment.

Maybe it is just your case and your employer has not set up a very beneficial ESPP but in general, it is no-brainer to contribute to these if offered. As long as you can execute same day sales and there are no prohibitive restricted trading periods that coincide with the ESPP purchase, then it is one of the few low risk and high return investments that we have in Ireland.

 

[ashambles]

This is wrong, Fungie20 has worked it out correctly. It doesn't matter what the exact $/€ figures are. If you are buying at a 15% discount, this is always a 17.6% gain on your capital.

As for your earlier example of €3k invested in ESPP. At the end of the cycle, you have €3k to buy discounted shares. If they are €10 FMV, you buy them at €8.50 (15% discount). Your will receive 352 shares at €8.50 (€2992). The leftover €8 usually just goes into your next cycle. So you have now bought €3520 worth of shares for €2992 or in other words, you have a 17.64% gain on your investment.

Maybe it is just your case and your employer has not set up a very beneficial ESPP but in general, it is no-brainer to contribute to these if offered. As long as you can execute same day sales and there are no prohibitive restricted trading periods that coincide with the ESPP purchase, then it is one of the few low risk and high return investments that we have in Ireland.

Fair enough, I'm NOT saying to not invest in ESPPs. ALWAYS invest in ESSPs. I always do. Just beware of costs at the end for lower amounts in the case where the share price isn't higher.

If I can get 7000 dollars from a US bank to euros in an Irish one for only 24e then that does change the calculation - how do I do that? I prefer to avoid Revolut for anything over a couple hundred euro - is this via N26 or what?

 

[Coldwarrior]

If I can get 7000 dollars from a US bank to euros in an Irish one for only 24e then that does change the calculation - how do I do that? I prefer to avoid Revolut for anything over a couple hundred euro - is this via N26 or what?

Transfer in USD to Revolut then change to euro within Revolut and transfer it straight away to your AIB, BOI etc
I'm wary of having large sums in Revolut too but doing it this way its only with them for a couple of hours.

 

[Coldwarrior]

in such a short amount of time with no risk (in theory, company could go bust, but unlikely. Also I think the money is kept in escrow, so not sure what would actually happen in this case)

There's another risk, a fairly lowish risk but one I've been stung by, if the USD/EUR exchange rate changes dramatically in the last month or two before the stock purchase, you can end up in a situation where the gross gain in euro in your account is less than the tax owed. This is due to each month's contribution being transferred to a USD holding/escrow account at the time its taken from your wages rather than holding it in a euro account and then only transferring it over to USD shortly before the purchase date to buy the stock.

Of course depending on the way the USD/EUR moves, this can work out in your favour also.

 

[daheff]

I think your broker has confused the two schemes. USC & PRSI are due in either case (approved or unapproved share schemes).

In my experience brokers generally don't have a breeze about how this works, or frequently quote UK legislative requirements.

Best get external independent advise or ask your HR department for further assistance.