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Income Tax on Fair Market Value or IPO price?

S1 filed for US company. Being told HMRC will tax on initial price rather than FMV at exercise.

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Hi,

I exercised my vested shares online before my American based employer filed their S1 but I didn't transfer the funds to my employer until 3 days after the S1 date.

I assumed I'd have to pay income tax and NI on the difference between the price I paid and the Fair Market Value at the time.

I'm now being told the tax and NI will be based on the initial opening price which could be much higher.

Do you know if this is correct please?

Replies (21)

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By Mr_awol
06th Sep 2021 15:46

What is the value of the share option?

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By beeza650
06th Sep 2021 15:56

Mr_awol wrote:

What is the value of the share option?


Do you mean the fair market value or my vesting price? Do you mind if I ask about the relevance please? The FMV is probably restricted information.
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By Mr_awol
07th Sep 2021 22:45

Well if we are talking about £75 of shares for an employee earning £20k per annum then you are in the right place because it really doesn’t matter and the tax implications will be insignificant.

On the other hand, if we are talking about £25k of shares to someone who habitually earns north of £100k then the tax implications are more interesting, and it would be worth giving someone a copy of the paperwork and paying them to advise you properly (plus of course, it also means you can probably afford to do that).

As you have subsequently been advised, any answer without the fact is likely to be a best guess.

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Psycho
By Wilson Philips
06th Sep 2021 16:45

The tax point is the date on which beneficial ownership is acquired. This may or may not be the date on which the exercise is notified, or may or may not be the date on which payment was made. You will need to read the documentation carefully and/or seek the professional help of someone that is aware of all of the facts. Most here will just be guessing.

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By beeza650
06th Sep 2021 16:52

I'm not sure where I should be looking for the relevant tax legislation. I had a good Google around before I posted my question. Do you have any pointers please? Why would most here be guessing? Have I not provided sufficient info?

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Psycho
By Wilson Philips
06th Sep 2021 17:13

You haven't provided nearly enough info. As I said, you will need to read the documentation, or have an adviser read it, in order to establish when you acquired beneficial ownership. If you want to look at the legislation, your starting point would be ITEPA 2003 s477. But that just confirms what I've said. You won't find anything in the tax legislation that will tell you when BO is acquired - that is dependent on the facts, of which we have very little knowledge in this case.

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By David Ex
06th Sep 2021 19:29
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By beeza650
06th Sep 2021 20:51

Blimey, a great deal of that makes very little sense to me. I couldn't see anywhere where it discussed FMV vs IPO offer price after S1 or anything along those lines.

It looks like it's not the sort of question I'm going to be able to answer myself and not something a 'general' accountant is likely to know.

Is there a name for the accountancy specialism I should be searching out?

Thanks

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Replying to beeza650:
Psycho
By Wilson Philips
06th Sep 2021 21:47

For goodness sake. ‘General’ accountants may well know what the answer is - if they have the relevant information to hand. The legislation is very straightforward, and it has nothing to do with “FMV v IPO”.

For the last time, it depends on when beneficial ownership was acquired, which is not something that is determined by tax legislation but by the terms of the transaction. If you were to pass all of the relevant documentation to me I’m pretty sure that I could give you the answer. Alternatively, you need to find an accountant with whom you’re happy to share all relevant info - s/he does not need to be a specialist.

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By Tax Dragon
07th Sep 2021 07:38

Told by your employer?

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By beeza650
07th Sep 2021 09:29

Yes, my employer is saying this.

They are giving me two options. Cancel the exercise and they'll return my money or wait until they decide on a price (I'm presuming the initial share price) and then pay them 47% of the difference between that and the vesting price...which I assume then goes as PAYE to HMRC.

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By Tax Dragon
07th Sep 2021 09:57

While you pay the PAYE, your employer is responsible for getting it right and could incur costs if they don't. My guess is that they will therefore rely on what their paid advisors tell them and won't rely on your advice.

It also sounds as if you don't yet have the shares. I guess that happens at the same time as the IPO. Which makes me kinda think that your employer's advisors are on the money. So to speak. (Those words "at the time when" in s479 are the killer.)

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Replying to Tax Dragon:
Psycho
By Wilson Philips
07th Sep 2021 10:22

Tax Dragon wrote:
Those words "at the time when" in s479 are the killer.

I don't disagree, but they do need to be read together with s477(4).

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Replying to Wilson Philips:
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By Tax Dragon
07th Sep 2021 15:10

Wilson Philips wrote:

they do need to be read together with s477(4).

Because, although s477(4) applies itself (solely) for the purpose of s477(3)(a) - that is, it says there's a chargeable event as soon as a beneficial interest is acquired, irrespective of whether there is at that time a transfer - and so may seem not to apply for s479, s479(2) (and s479(3), which I quoted) are about determining the charge on an event within s477(3)(a). This can make sense only if the acquisition referred to in s479(3) is that within s477(3)(a), which is interpreted by reference to s477(4).

In short… +1.

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By beeza650
07th Sep 2021 10:49

I don't have the shares, correct, they won't issue them until they know the IPO price - I don't know if that means they won't actually "know" the IPO price until IPO and therefore that's when I get the shares. There's nothing in my contract with the employer about this exact situation nor clarification in the emails so far.

It's highly likely advice from me isn't going to change things but if they've applied the tax rules incorrectly then at least I can claim it back.

To summarise, I submitted the request to exercise the shares before S1, I paid after S1. The employer is withholding shares and saying instead of being taxed against FMV when exercise was submitted it's instead against a future value which I assume will be IPO price.

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Replying to beeza650:
Psycho
By Wilson Philips
07th Sep 2021 11:52

So, the shares don't actually exist yet? ("They won't issue them until ...")

If that is the case, the exercise date is likely to be of little relevance - as your comment suggests, your exercise notice was nothing more than a request to your employer to issue you with new shares.

With some notable exceptions one cannot own an asset for tax purposes before said asset exists. In the broadest possible terms, you will not have acquired the shares until they are registered in your name (unless someone is holding them in trust for you) - it will be the MV at that time that is relevant.

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By beeza650
07th Sep 2021 12:39

I don't really know what is meant by 'exist'. I assume the company is split into x number of shares already so in that sense they would exist but I don't own them yet, no share certificate etc.
They won't issue them to me until I pay the tax and they won't tell me how much tax till they decided on a share price because they say HMRC must tax on that rather than FMV at the time I paid for the shares because that was after S1

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Psycho
By Wilson Philips
07th Sep 2021 13:24

The shares may already exist (in which case someone already owns them and will subsequently transfer them to you). Or it may be the case (more common in the case of options) that when you notify your exercise the company will issue new shares and put them in your name.

But you need to stop focussing on dates of exercise, payment, S1 etc. The only date that is relevant is the date on which you acquire(d) beneficial ownership of the shares. That date will be determined by the documentation. Without sight of that documentation nobody here is going to be able to confirm whether or not your employer or their advisers are correct.

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By beeza650
07th Sep 2021 13:58

Which documentation are you referring to please?
I can't see that I have 'beneficial ownership' of anything at this time.

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Psycho
By Wilson Philips
07th Sep 2021 14:54

I was assuming (a dangerous thing to do) that there would be paperwork setting out the terms on whch the option could be exercised, payment amount, due date for payment, how/when the shares would be tranferred into your name etc etc etc. In other words, absolutely everything connected with the option and its exercise. If you were my client, coming in for a meeting to discuss this, I would be asking you to bring with you everything that you had relating to it. I'm not going to guess exactly what paperwork may or may not exist.

But if you don't have beneficial ownership of the shares yet, then everything that has gone before (exercise notification, payment *, S1 etc) is of no relevance in computing the tax charge. You need to wait until you have beneficial ownership, with the MV at that time being the relevant figure. That may or may not be the same as the IPO price.

* the payment amount is of course a factor in computing the charge, but the date of payment may well be irrelevant

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By Leywood
07th Sep 2021 23:57

[quote=beeza650]

Which documentation are you referring to please?

Paperwork setting out the deal, t and c’s, it cannot possibly be an on the back of a civvies packet deal. Any competent Accountant can then stop you assuming, presuming and guessing.

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