U
US
Guest
Tax on options
“. . . what date/valuation would be used to calculate the liability in the case of an option which the recipient chose NOT to exercise?”
The chargeable event is the assignment or release of the option. I think that means that the relvant date is the date on which the opportunity to exercise is lost. So if I have an option which is exerciseable any time between now and 31 December 2004, and I do not exercise, I have released the option on 31 December 2004 and the charge to tax will be based on the market value of the shares on that date.
“. . . does anyone know the BIK liability for share options in a private company? . . .”
The rules are the same as for a quoted company. What matters is the value of the shares on the date the option is exercised or released. The Revenue has a share valuation section which does little else but determine what the value of shares in a private company are at any given date. Strictly speaking this is a matter between the indivdual taxpayer and the Revenue, but in the context of an employee sharee scheme the employer will usually approach the Revenue and get a determination as to the value of its shares on behalf of all the optionholders who exercise or release on a given date.
“. . . Can you clarify what is meant by 'assigned or released'? If I'm granted options that vest monthly over a long period of time, I can see how a tax liability occurs when I exercise the option as I have realised a gain. Are you saying that there is tax liability when the options are granted? Or vested? Or any other time before I exercise the options? . . .”
So long as the option must be exercised, if it is exercised at all, within seven years of the date of grant, there is no charge to tax on the date the option is granted. There is no charge to tax on the date the option vests. There is a charge to tax on the date of exercise or, if you do not exercise, the date of assignment (i.e. when you transfer the option to someone else, where this is possible under the rules of the scheme – it usually isn’t) or the date of release (i.e. you give up the right to exercise the option at all).
“. . . 'exercise & sell to cover' . . . I'm not sure if this concept is covered in the tax legislation . . .”
Not explicitly, but it doesn’t need to be. The ordinary rules cover it.
Suppose I have an option to buy 100 shares at €1 each. The market value of the shares is €5. My marginal tax rate is 20%.
I exercise the option over all the shares. My tax bill on exercise is 100 x (€5 - €1) x 20% = €80.
I immediately sell 16 shares for €80. I am treated for CGT purposes as having acquired the shares at the market value of €5 each, so I have no gain. I use the sale proceeds to pay my tax.
I am left holding 84 shares, which for CGT purposes I am treated as having acquired for €5 each. When I sell the shares later on, this will be my acquisition cost for the purposes of calculating any gain.
“. . . what date/valuation would be used to calculate the liability in the case of an option which the recipient chose NOT to exercise?”
The chargeable event is the assignment or release of the option. I think that means that the relvant date is the date on which the opportunity to exercise is lost. So if I have an option which is exerciseable any time between now and 31 December 2004, and I do not exercise, I have released the option on 31 December 2004 and the charge to tax will be based on the market value of the shares on that date.
“. . . does anyone know the BIK liability for share options in a private company? . . .”
The rules are the same as for a quoted company. What matters is the value of the shares on the date the option is exercised or released. The Revenue has a share valuation section which does little else but determine what the value of shares in a private company are at any given date. Strictly speaking this is a matter between the indivdual taxpayer and the Revenue, but in the context of an employee sharee scheme the employer will usually approach the Revenue and get a determination as to the value of its shares on behalf of all the optionholders who exercise or release on a given date.
“. . . Can you clarify what is meant by 'assigned or released'? If I'm granted options that vest monthly over a long period of time, I can see how a tax liability occurs when I exercise the option as I have realised a gain. Are you saying that there is tax liability when the options are granted? Or vested? Or any other time before I exercise the options? . . .”
So long as the option must be exercised, if it is exercised at all, within seven years of the date of grant, there is no charge to tax on the date the option is granted. There is no charge to tax on the date the option vests. There is a charge to tax on the date of exercise or, if you do not exercise, the date of assignment (i.e. when you transfer the option to someone else, where this is possible under the rules of the scheme – it usually isn’t) or the date of release (i.e. you give up the right to exercise the option at all).
“. . . 'exercise & sell to cover' . . . I'm not sure if this concept is covered in the tax legislation . . .”
Not explicitly, but it doesn’t need to be. The ordinary rules cover it.
Suppose I have an option to buy 100 shares at €1 each. The market value of the shares is €5. My marginal tax rate is 20%.
I exercise the option over all the shares. My tax bill on exercise is 100 x (€5 - €1) x 20% = €80.
I immediately sell 16 shares for €80. I am treated for CGT purposes as having acquired the shares at the market value of €5 each, so I have no gain. I use the sale proceeds to pay my tax.
I am left holding 84 shares, which for CGT purposes I am treated as having acquired for €5 each. When I sell the shares later on, this will be my acquisition cost for the purposes of calculating any gain.
