Tax on share options, vesting

[fergalr]

In an unapproved share options scheme,
where the employee gets share options with a 10 year exercise (i.e. a long option),
and the shares vest over time:

Let's say that at grant the shares are valued at 10 euro each by the company (based on its last investment), and the option strike price is also at 10 euro.

Therefore, I understand there is no income tax due on grant.


However, there might later be income tax due on exercise, on the difference between the price at grant, and the price at exercise, if the shares have gained in value.


Question:
Does vesting affect this at all?
Lets say some of the (previously granted) option (with a 10 euro strike price) vests when the shares are now valued at 20 euro by the company.

Does the employee have any tax liability on the vesting? (if they are not exercising yet)

This must be a common situation, but I can't find information on it online.

Anyone know the answer? Got a reference?

 

[Joe_90]

[broken link removed]

Did you read this?

 

[fergalr]

Did you read this?

Thanks - that document and others don't seem to mention vesting.
This leads me to believe that vesting isn't an issue - that as long as the strike price is the same as the share value when the option is granted, whether/when it vests (and what the price might be as it vests), isn't an issue. (Of course tax has to be paid if it is later exercised.)

However, this isn't clear; in particular, I've read that RSUs are taxed on vesting, so it'd be great to read something clarifying the situation with options, or hear from others who have seen this before.

 

[dub_nerd]

I can't quote you the letter of the law, but I can tell you what happened to me and hundreds of colleagues when in that situation. As you assumed, the date of vesting has no bearing on anything. Tax liability occurs at the exercise date on the difference between the price paid for the option and its value when exercised.

This was an unapproved share scheme, but I have no memory of short or long options ever being specified at the time, or even being aware of the concept. I'm pretty sure some of them were exercised more than seven years after being either granted or vested, but no tax was paid other than at exercise time.

 

[Jon Stark]

Thanks - that document and others don't seem to mention vesting.
This leads me to believe that vesting isn't an issue - that as long as the strike price is the same as the share value when the option is granted, whether/when it vests (and what the price might be as it vests), isn't an issue. (Of course tax has to be paid if it is later exercised.)

However, this isn't clear; in particular, I've read that RSUs are taxed on vesting, so it'd be great to read something clarifying the situation with options, or hear from others who have seen this before.

What isn't clear?? Why are you trying to make it more complicated than it already is?

The Revenue Tax & Duty manual Joe linked to above, which is Revenue's instructions to its own staff doesn't mention vesting, so it's clearly not relevant.

Same way that it doesn't mention what to do if the weather was snow on the day of exercise, or what colour underpants you had on on the day of grant - irrelevant. If a manual was to list all the things that aren't relevant, it'd be a very long manual indeed.

 

[fergalr]

Thanks all - I'm happy that vesting isn't an issue.

On Jon's point:

What isn't clear?? Why are you trying to make it more complicated than it already is?

The Revenue Tax & Duty manual Joe linked to above, which is Revenue's instructions to its own staff doesn't mention vesting, so it's clearly not relevant.

Same way that it doesn't mention what to do if the weather was snow on the day of exercise,

If the weather was snow, Jon Stark?
I think you know nothing.

or what colour underpants you had on on the day of grant - irrelevant. If a manual was to list all the things that aren't relevant, it'd be a very long manual indeed.

In my opinion, the weather is a priori very unlikely to be relevant, so of course the manual shouldn't list that.

However, as I said, other similar instruments (RSUs) are affected by vesting for taxation, so its reasonable to wonder whether options might be.
People generally talk about options going through 3 stages - grant, vest, exercise - so I think its reasonable to want clarification.

Better safe than sorry with this sort of thing; plenty of people have been stung by tax codes on assuming that because something isn't explicitly mentioned it's irrelevant.

 

[dublin66]

There is no tax issue with the vesting of share options in any circumstance. Statutory reference is section 128 of the Taxes Consolidation Act 1997.

Vesting is relevant for RSUs but not for share options.