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Employment related securities and CGT

Shares sold back to an ex-overseas employer and taxed at source (Germany) BUT CGT liability due UK

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I know it's Friday afternoon but hopefully someone with similar case in the past can help me... Thank you!

Discussed this matter with 2 different tax advisers from our tax helpline , still nowhere close to the resolution. Any suggestions will be greatly appreciated...

The scenario is as follows:

Client (UK resident for tax purposes since Apr-19) has disposed his shares received as part of remuneration when working in Germany in 2017. Value of the disposal approx £630,000 dated May 2020. These would be treated as Capital Gains Tax in the UK resulting in approx £123K worth of CGT to pay (additional rate TP - 20% CGT above £12,300).

These shares were effectively bought-back by the ex-employer and taxed at source in Germany at the rate of approx 45%. Client has received the balance to his UK bank account.

The problem is that this exercise of the share options were treated as Employment Income not as Capital Gains Tax.

Option 1 would just offset the tax due against the tax paid after x-rate conversion but this is pragmatic choice and not necessary the correct one, especially as the liability discussed is somehow likely to draw HMRC attention. 

Option 2 would be to calculate UK CGT due and then add £630K as overseas employment income with appropriate foreign tax relief. But would this not been seen as double-counting the £630K. I realise that this would not create extra tax to pay but in itself it feels wrong here. Besides foreign tax relief on this employment income is lower than CGT due.

Option 3 would be to effectively treat this income/tax as a employment income in line with German paperwork.

I realise that this one-off is completely beyond our experience but at the very least would like to try to find out the right treatment or pointing me out into specific manual or Tolleys library. 

Many thanks in advance for you input.

Replies (8)

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By Hugo Fair
21st Jan 2022 18:33

You've offered up 3 alternative 'options' after mentioning that you've already discussed this matter with 2 different tax advisers ... so would you care to share the option chosen by each adviser - and perhaps more importantly their reasoning?

As you say this is 'one-off' scenario (and unlikely that sufficient detail can be publicly declared), but the professionals' reasoning may help others to give you pointers.

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Replying to Hugo Fair:
panda ketteringUK
By ketteringUK
24th Jan 2022 13:12

Their opinion was a follows:
1) CGT pages for disposal of shares less cost of acquisition (this being the tax deducted in Germany at the time of 'gifting' them to the employee
(HS287 - Unapproved employee share or securities schemes)

2) Since the disposal of shares was treated as employment income in Germany, then we should fill in the foreign income pages with income details & tax paid which would then generate relief to offset against CGT.

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By Matrix
21st Jan 2022 19:48

What have you used as the cost of the shares and when were the options exercised?

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Replying to Matrix:
panda ketteringUK
By ketteringUK
24th Jan 2022 13:07

Since the shares were part of remuneration upon cessation of employment, as cost of the shares, i intend to use the tax paid on these when these have been given to him in 2017.

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Replying to ketteringUK:
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By Matrix
24th Jan 2022 20:31

Why not the market value?

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Replying to Matrix:
panda ketteringUK
By ketteringUK
25th Jan 2022 09:23

HS207 , Unapproved employee share or securities schemes

'Actual cost plus amounts, if any, charged to Income Tax on acquisition, variation, removal of risk or on removal of risk or on disposal subject to risk'

as Client did not pay for these, the only costs were Income Tax on acquisition.

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By Tax Dragon
21st Jan 2022 19:56

That's an impressive company - minor(?) shareholding went from zero to 630k in 3 years?

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By Tax Dragon
25th Jan 2022 22:19

Lots of points here. A selection:

1. Read the introduction to the section of HS287 that you quote above.

2. Is that the right section anyway? Your OP mentions share options, your quote is the not-an-option-scheme one.

3. The amount charged to income tax means the amount on which income tax was charged. Not the tax that was paid.

4. But that's UK income tax. Your client won't have paid UK income tax.

5. The logic is that you would pay UK income tax on market value less payments made - so payments made plus amounts charged to UK income tax equals market value. Again, see the introduction.

6. The reason the formula is payments plus amounts (rather than just MV) is that amounts arise under ERS on changes of rights and all sorts of other things. Just applying MV wouldn't capture them all.

7. That said, read s17 TCGA. In full.

8. That said, that you mention (German) income tax charges in 2017 and now, I figure it probably was options. (Confused about how 630k at 45% is less than the CGT - but I don't think that matters, as how can you set German income tax against UK CGT?)

9. Options makes it more interesting - s17 isn't enough.

10. For tax on 630k, would you not consider buying in advice? Much of what you have said is, how to say this?... ah yes, unsupported by law.

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