US equity for UK employees – tax considerations

20th March 2024

A common scenario for UK subsidiaries of US headquartered businesses is UK based employees being awarded equity in the US parent company. This article explores some of the key UK tax considerations to be aware of.

Type of equity offered

The equity offered to UK subsidiary employees will typically replicate what is offered to US employees. This may include any of the following:

  • Options, including US tax-advantaged Incentive Stock Options (ISOs)
  • Restricted Stock Units (RSUs)
  • Profit units (in the case of a US LLC parent)

Are such awards taxable in the UK?

Where the employee is working in the UK, such awards will be subject to UK tax. This can be problematic in practice if awards are made by the US parent, without informing the finance or HR team of the UK subsidiary. The UK subsidiary will be responsible for operating any Pay As You Earn (PAYE)/National Insurance Contributions (NICs) due and paying any penalties for non-compliance.

Key UK tax considerations

Where equity is offered to UK employees, it is important to review the documentation from a UK tax perspective. The key considerations will include:

  • Will Income Tax be due on award?
  • Will Income Tax be due on a later vesting of the award or later sale of the equity?
  • If Income Tax is due, will PAYE and NIC withholding be required?
  • Does the documentation contain adequate PAYE/NIC withholding clauses and indemnities to protect the employer?
  • Does the documentation specifically authorise the employer to pass the cost of any employer NIC to the employee?
  • Should protective ‘section 431’ tax elections be considered?
  • How should the awards be reported to HMRC on the UK subsidiary’s Employment Related Securities Annual Returns?

Can we improve what is offered?

Where awards have been designed from a US tax/legal perspective, they may be inefficient from a UK tax perspective.

Whilst it is generally not agreeable from a US perspective to make material changes to scheme rules or to create new share classes to suit the interests of the UK employees, in some cases it is possible to modify awards to improve the UK tax position.

For example, an option scheme would normally have significant PAYE/NIC charges on exercise, but by making small changes to the individual option certificates or by adopting a UK sub-plan to operate alongside the US main plan, it may be possible to restructure as UK tax-advantaged Enterprise Management Incentive (EMI) or Company Share Option Plan (CSOP) schemes. This can create significant tax savings for the UK subsidiary and its employees, whilst having little to no effect on the operation of the scheme, from a US perspective.

For further advice on US equity options for UK based employees, please contact David Bareham, Share Schemes Director.

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