April 28th, 2014 / Insight posted in The Sunday Times Business Doctor

Share options hit by move to America

DS writes: My company recently received some investment and I plan to expand overseas and open an office in America. One of my team is likely to relocate to run this. Will this affect share options he has been granted under the Enterprise Management Incentives scheme?

This could affect the share options as your employee will no longer be a UK tax resident when he moves to America, writes Jon Dawson, partner at Kingston Smith LLP.

When EMI options are granted, a price is set. When the options are exercised, the original price is used for tax purposes rather than the exercise price. This means employees receive their shares at a lower cost than they would ordinarily pay when the share price has risen, but the gain is liable to tax.

If your employee exercises his options after a period of working in America, the gain will be taxable in both countries. It is normally time-apportioned between employment in Britain and America. The UK gain is subject to EMI and therefore no tax should arise, assuming the options were not granted at a discount. The gain in America will be liable to federal and state income taxes.

Your employee will also pay tax at a higher rate if he sells his shares when resident in America.

A sale while resident in the UK should normally be eligible for Entrepreneurs’ Relief and therefore a 10% rate of capital gains tax.

One of the main downsides of this will be that your employee will lose out if he has a tax bill in America. To keep him incentivised, you could consider giving additional salary to help cover the tax or grant him further share options. Alternatively, you might be able to override the share option qualifying conditions so that some options can be exercised earlier while he is still in the UK.