RSU of a US company under UK tax law

This is going to be a fun one, because I went through this just now! There are surprisingly little information about this collected in one place, and even when I asked very pointed questions to accountants and financial advisers, they either did not know, or told me we should wait until Things Happen™, and there’s Documentation™, so we know how things will work.

Luckily Things Have Happened™ and Documentation™ has been created, and I had a chat with my lovely accountants, and now we know how this happens (with one specific platform).

I really wanted to use actual numbers, however in this specific case I can not, because even though UK law protects me around my compensation, the RSUs that I was granted were part of an acquisition deal, which is a highly confidential piece of document, so I’ll be using example numbers. You should still be able to follow and figure out what exactly is happening. So let’s begin!

Some assumptions:

• you’re in the UK, you’re getting paid by the company’s local office and you’re employed by the UK office
• the stock grant you get comes from the US company, because that’s the one listed on the NASDAQ
• stocks are given in US dollars

Grant

RSUs are restricted stock units. They are not options. Wikipedia goes into a lot more details, but the short of it is that RSUs are:

• actual stock in the company, not an option to it, not an exchange traded fund, not a contract for difference. It’s not leveraged, you get an actual whole stock. Or many of them
• they are restricted, which means you only get them if certain conditions are met. This is usually going to be some amount of time passed, and if you’re still employed by the company giving them to you, and there are no other issues like disciplinary hearings, the stocks will be released to you, at which point they become regular stock

Let’s look at an example: you’ve accepted a position at ACME Corp, and you’re starting on March 1st. That’s your first day on your job. Your compensation package also has RSUs in it. You’re told you’re getting $160,000 of RSUs granted on April 1st, over a 4 year period, with 25% vesting at year 1 after grant, and the remaining will vest proportionally every quarter for another 3 years.

ACME uses etrade as their brokerage firm. Other companies might use different bokerage firms. As part of onboarding you’re also required to create an account with etrade, or link an existing one if you have one, and add all the relevant details they ask for. These are usually citizenship(s), tax residency, proofs of those, etc. etrade will use all of these data to figure out their legal and tax obligations.

The share price of ACME on March 1st is $63.22. That’s irrelevant, because that’s not when you’re being granted the RSUs. Share price on April 1st is $68.11.

To get the number of actual stocks you’re granted, you divide the $160,000 by its current share price: $68.11 on grant day: 2,349.141095287. This is probably going to be rounded to 2,349 stocks, or maybe rounded up to 2,450 stocks, depending on the internal policies of the companies, or some rules and regulations of the SEC or another regulatory body, which I don’t know. You will probably not get fractional shares. I’m going to use 2,349 stocks in the example. You’re now locked in, you have that many restricted stocks.

The first question here is: do you pay income tax on restricted stock? You’re given stock that you can’t reach, and it’s a lot of money, and you’re already in the additional rate bracket paying 45% on any money above your salary, so suddenly paying $72,000 (45% of $160k) would be kind of difficult.

No, you don’t pay tax on this yet. At least I didn’t pay tax on it at the time. I figured because I do not have access to that money, only a promise of it, it’s unrealised income, which means it can be taken away, so there’s no point in paying tax on it.

Vest

A year later, on April 1st you get the first 25% vesting. You have 2,349 stocks, 25% of that is 587.25, which is probably going to be rounded down again to 587.

On vesting day your company instructs etrade to release 587 stocks to you. etrade knows that you’re getting US stock, and you’re a UK tax resident, you need to pay taxes on these, and they also know your tax rate, or the company told them that.

etrade will have a configuration option turned on called “sell to cover.” That option is basically this: “we know you have to pay 45% tax on any income, and these shares will count as income, so we’ll automatically sell 45% of those when they are vested and you have access to that, so your tax obligations are taken care of.”

As the share prices move within a day, when your stocks are released to you and when the automatic selling of a portion of those happens might have a lot of time between them. Let’s suppose trading starts at $71.22, and that’s going to be the anchor they use to calculate the monetary value of the stocks released to you. Also known as cost basis.

45% of 587 stocks is 264.15, but to be conservative they’ll probably issue a market order to sell 265 shares. Market order just means “sell this at whatever the current price happens to be when you find a buyer for them.”

If the price drops to $70.72 during the day and that’s when the order gets executed, that would mean they didn’t sell enough shares. The 45% rule is for money, stocks are not money, so the 45% of the stocks sold for less than 45% of the monetary value of the 587 stocks, so they might sell an additional 1 or 2 stocks to cover the difference. Once those also go through, you will be left with your now unrestricted stocks in your account: 321 shares, assuming they had to sell an additional one: 266.

What you do with those stocks is now entirely up to you: your taxes have been taken care of. Sort of. I’ll bring this up in a moment. You can keep the shares, so their value moves with the market value of the company’s stock, you can immediately sell it at market order, or you can add a limit order for some value, and if the price goes above that, the shares get sold.

Taxes

You will need to pay two different kinds of taxes in the UK on stocks:

1. PAYE, or regular income tax, which will depend on your tax bracket, on the amount of money the vested shares are worth on the day when they are granted to you at the price they are granted to you. In the above example that’s 587 shares at $71.22. That’s the cost basis. You’ll get an email and document about it
2. and capital gains tax on any gains you had on trading shares of a company. This will be on the difference between the cost basis and however much you sold it for times the amount of shares you sold at that price, minus any allowances

For the sake of argument, let’s suppose you put in a limit order of $85 for your remaining 321 shares, and the stock market was generous to you, and 34 days later, on May 5th, the stock price reached that, the order executed, and your 321 shares sold for $85.73. Remember that the price needs to be above your limit, not necessarily at your limit.

You’re already at the additional rate of 45%, and because this is a US stock and therefore doesn’t fall into the employee shareholder status scheme, your tax free allowance is £3,000 a year.

A rough back of the napkin calculation will look like this:

1. you were granted 587 shares at $71.22, which totals $41,806.14. You need to pay $18,812.76 (45% of the 41.8k) tax on it, which is roughly 266 shares at $70.72 when it got executed
2. your payslip would list the $41.8k USD as £31,482.91 of additional income for the month on the income side of the payslip with a note that it’s shown, but not actually paid into your bank account
3. on the deductions (taxes) side of your payslip you would have -$18.8k as
   -£14,167.31 because you’re getting paid in British pounds. That negative is there because etrade has already paid the taxes for you, so ACME also didn’t deduct anything from your pay that got paid into your bank account
4. you then sold 321 shares at $85.73, with a difference between the cost basis – $71.22 – and this one being $14.51 profit per share, or $4,657.71 total, or £3,507.70 in British pounds
5. your tax free allowance is £3,000, which leaves a capital gains of £507.70 taxable. Current capital gains tax rate for these shares for the tax bracket you’re in seems to be 20%, which means you’ll have to pay HMRC £101.54 (20% of 507.70) at the end of the tax year, usually by self assessment
6. in the UK the tax year for natural persons runs from 6th April to 5th April, then you have a buffer to prepare your own tax return, and once you submit that you have to pay any outstanding monies to HMRC. The deadline to prepare the return and pay the taxes is the same, so do not leave this to the last minute. The buffer is 9 months at the moment

Conclusion

Taxes are fun! I mean they’re fun for me. I had a lot of help from my accountants, they’re excellent, and if you’re a freelancer or contractor in the UK, I’d love to introduce you to them!

That said most of the taxes are already taken care of, so there won’t be any huge surprises besides that half of the $160k RSU is going to go to taxes anyways.

And again, before submitting documents to HMRC, please talk with a professional who is qualified to give you advice on these. I am not one of them.

Hope you found this helpful! If you did, you can leave a tip in my tip jar 😇.