Managing US stock incentives for UK employees: a simplified tax guide

For US businesses operating in the UK, offering stock options is a common way to motivate and retain key team members. However, these incentives come with tax implications that need careful management.

Tax implications for UK employees with US stock options

UK employees with US stock options might not be part of a tax-efficient UK scheme recognised by HMRC. This means UK income tax and national insurance could apply when they receive shares.

Types of US stock options

• Non-Qualifying stock options (NSOs): These aren’t approved for tax purposes in the US or UK. In the US, they’re taxed as employment income when used or vested. In the UK, if the employee is a UK resident and works in the UK, they’re subject to UK income tax and national insurance. They might also owe US income tax and social security tax but can potentially offset this against their UK tax.
• Incentive stock options (ISOs): These are approved for US tax but not in the UK. They might lead to alternative minimum tax (AMT) in the US for some taxpayers. UK employees can claim a credit for this AMT against their UK tax when they sell the shares.

Payroll and reporting

If stocks are traded on a recognised exchange, they’re considered ‘readily convertible assets’ by HMRC. This means their value might need to be reported and taxed through payroll. For employees working in both the US and UK, managing both countries’ payrolls might be necessary. Employees can reduce their UK tax by claiming credits for US taxes paid.

National Insurance and Capital Gains Tax (CGT)

National insurance is usually only paid for by UK residents. A coverage certificate might be needed to avoid double charges with US Social Security. Capital gains tax could apply in both countries when selling stocks, depending on where the employee works. Foreign tax credits can be claimed against UK tax liabilities.

Upon sale, the stocks can be subject to capital gains tax (CGT) in both the US and the UK, dependent upon the type of stock and the split between the workdays spent by the employee in either jurisdiction. The employee may be able to claim a foreign tax credit for the US tax paid against the UK tax liability under the US/UK double tax treaty. Where it is possible to make an election, thought should be given to the valuation on which UK income tax is paid so that any increase in value might be chargeable to capital gains tax rates in the UK instead of income tax rates which are usually higher.

Dividends

Dividends from US company stocks might face US withholding tax. Employees can often claim a foreign tax credit against their UK tax. It’s important for both employers and employees to keep detailed records of all stock transactions for accurate tax calculations.

Keeping Records

The UK tax implications of US stocks may vary depending on the residency status of the employee, the source of the income or gain, the currency of the transactions, and the exchange rates used. The employer and the employee should keep records of the dates and amounts of any grants, exercises, sales, dividends, market values and exchange rates to calculate the tax liabilities and foreign tax credits accurately. To ensure that an employer meets their tax reporting obligations and their employees pay the correct amount of UK taxes, the locations where employees work need to be tracked. This is especially important in the agile and remote working world we operate in.

Reporting Events

In addition to any payroll reporting, employers may need to undertake annual UK filings with HMRC in respect of ‘employment-related securities’ obtained by UK based employees. These are often informational filings that carry no tax liability, but HMRC can charge penalties for late or incorrect reporting.

UK-based employees may also need to report stock transaction events on a personal UK tax return.

How can Moore Kingston Smith help?

Dealing with the tax implications of US stock options in the UK can be complex. Moore Kingston Smith is here to help. Whether you’re a UK employee needing to understand your tax liabilities, or a business owner concerned about reporting requirements, our team is ready to assist. Contact our Entrepreneurial Businesses Team for a chat about your needs.