United Kingdom – Amendment to Taxation of Share-Based Awards

United Kingdom – Amendment to Taxation of Share-Based

A recent amendment to the new U.K. rules on how share-based awards held by internationally mobile employees (IMEs) are taxed, set to come into force on April 6, 2015, will potentially allow any amounts chargeable to U.K. income tax on the vesting of restricted shares to be reduced by any amounts that were charged to non-U.K. income tax on acquisition. This may result in some of these employees paying less U.K. income tax than others (depending on the type of award and individual circumstances).

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Flash Alert 2014-068

A recent amendment1 to the new U.K. rules on how share-based awards held by internationally mobile employees (IMEs) are taxed, set to come into force on 6 April 2015, will potentially allow any amounts chargeable to U.K. income tax on the vesting of restricted shares to be reduced by any amounts that were charged to non-U.K. income tax on acquisition.

WHY THIS MATTERS

With the U.K. tax treatment of certain share incentives of IMEs changing, effective from 6 April 2015, existing awards will be affected, so that the U.K. tax treatment may differ from that which the assignee expects.

Background

As discussed in Flash International Executive Alert 2014-032 (20 March 2014) Finance Bill 2014 is set to enact sweeping changes to the way in which share-based awards held by IMEs are taxed in the United Kingdom. 

The Finance Bill received Royal Assent on 17 July 2014, becoming Finance Act, 2014.

The recent amendment concerning restricted shares is discussed below.

Changes to How IMEs’ Share Awards Are Taxed in the U.K.

From 6 April 2015, IMEs will generally be charged to U.K. income tax on the proportion of the award that corresponds to the proportion of the ‘relevant period’ that the IME was working in the United Kingdom.  For restricted shares, the ‘relevant period’ is generally the date of acquisition to the date of the chargeable event (e.g., when restrictions are removed).

KPMG NOTE

While it is expected that these changes will be broadly positive, they will result in some IMEs paying less U.K. income tax under the new rules and others paying more, depending on the type of award and the employee’s individual circumstances. 

Potentially Adverse Outcome for U.K. Inbounds

For example, consider a U.K. inbound employee who acquired restricted shares before arriving in the United Kingdom.  Since such an individual would not have had the opportunity to make an election to be chargeable to income tax only on acquisition, a charge to U.K. income tax would potentially arise on the vesting of restricted shares (i.e., when the restrictions lift) where such vesting occurs on or after 6 April 2015.

Under the original version of the legislation, although a foreign tax credit may have been available for foreign tax paid on acquisition under the treaty, U.K. tax would remain due on vesting under a number of scenarios including being due on a proportion of any growth in value, even if the employee was taxed on the full unrestricted market value of the shares at acquisition. Additionally, the U.K. tax rate may be greater than the foreign tax rate so that some U.K. tax may effectively be due on the amount taxed at acquisition. 

New Amendment

Under a recent amendment to the legislation, when the individual is taxable overseas on the full unrestricted market value of shares at acquisition, U.K. tax will not be charged when the restrictions lift.

Please note that assignees from other countries that tax restricted shares on acquisition, but allow for a discount to be taken to reflect the restrictions attaching to the shares, will still be subject to some U.K. income tax on vesting. 

FOOTNOTE

1  See the Schedule 9, Finance Bill 2014 at: http://services.parliament.uk/bills/2014-15/finance.html .

The information contained in this newsletter was submitted by the KPMG International member firm in the United Kingdom.

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