This client is returning to the UK and will continue to work for this same employer with the RSUs vesting over the following 3 to 4 years every March. How will these RSUs be taxed and is there any specific treatment for capital gains tax purposes?”
Restricted Stock Units (“RSUs”) are a very common part of a remuneration package by US employers. The UK tax treatment of RSUs was uncertain until 6 April 2016 as RSUs were normally taxed under money’s worth principle, ITEPA 2003, s62.
The position was put beyond doubt from 6 April 2016 that for RSUs, the rules for securities options takes priority over general earnings, ITEPA 2003, s418 (1A) with the explanatory notes from F (No.2) A 2016 here specifically commenting on RSUs and from HMRC’s manuals at ERSM20192.
The taxation of employment related securities (“ERS”) was substantially changed with effect from 6 April 2015 with the insertion of ITEPA 2003, Part 2, Chapter 5B. The broad effect is to reduce taxable securities income (the gain) by reference to the vesting period:
– Chargeable securities income for taxpayers that are non-domiciled that qualify for overseas workday relief, ITEPA 2003, s26A, or chargeable overseas income for those who do not qualify for overseas workday relief, ITEPA 2003, s22 during part of the vesting period.
– Unchargeable securities income where non-resident or qualifying for split-year treatment during part of the vesting period.
For example, a RSU granted 1 April 2022 vesting 31 March 2025 with a gain of £2,000 would be broadly taxable in the UK as 5/36 with 5-months while UK resident over a 36-month vesting period of just c£278.
There is some uncertainty as to the interaction of ERS and base cost for CGT purposes, namely whether the RSU where it falls short of a formal option as defined at ITEPA 2003, s420 (8), will reduce the base cost. One such interpretation, and the expectation that many listed company RSUs will be formalised through the RSU grant documentation provides a “right” capable of being a securities option for CGT purposes. I have assumed that is the case here that would mean:
– The part of the securities income not subject to UK income tax reduces the base cost for CGT purposes, TCGA 1992, s119A and s119B.
– Market value rule of TCGA 1992, s17 is specifically disapplied by TCGA 1992, s149A that could otherwise provide a tax-free uplift on the option itself as does TCGA 1992, s144ZA on exercise of the option, with some commentary from HMRC at CG56321.
Continuing the above example, if the securities acquired were sold shortly after exercise for total proceeds of £2,100, the gain for UK CGT purposes is £2,100 – £278 = £1,822.
There may however be some foreign tax credit relief to consider, particularly if your client has been working overseas in jurisdictions with high rates of employment tax as your client is inadvertently suffering double taxation.
Part of the “cost” basis not subject to UK employment tax, the difference of £1,722 has been subject to tax overseas that should be eligible for foreign tax credit, effectively restoring the base cost of £2,000 provided the rate of overseas tax is the same or higher than UK CGT rate. This ensures only the true gain of £100 is only subject to UK tax after deducting foreign tax credit.
HMRC appear to agree with this principle as they comment at INTM169040 that foreign taxes to be creditable are by reference to the same gain, not that the tax liability needs to arise at the same time. There administrative complications, namely the building and maintenance of a share pool for UK tax purposes and ensuring overseas taxes are mitigated as far as possible to be creditable for UK tax purposes, TIOPA 2010, s33.
For further guidance on the taxation of RSUs, see Croner-i Tax In Depth at 472-330 and 472-580.
