PAYE Taxpayers >> How Share Options are Taxed

Tags: share option gains, share options tax, unapproved share options

General

Share options are generally granted by Public Companies to employees. There are a variety of share option schemes and the tax treatment depends on the terms of same and if the scheme has been approved by the Revenue Commissioners.

An employee will normally receive an option to buy a certain number of shares in his/her employer company at a fixed price. If the share price goes up then the employee could make a significant gain when the option is exercised.

For 2011 onwards there has been a major change in how the benefits of such schemes are taxed. The benefits of Share Award Schemes, Unapproved share Option schemes and Revenue Approved plans are now liable for PRSI and the Universal Social Charge (USC).

What Happens If I Make a Gain on Share Options?

How the tax rules operate is best explained by the following example:

  1. Mr. Smart receives a share option whereby he can buy 10,000 shares in his employer company. The share option plan has not been approved by the Revenue Commissioners. The price per share is €1 which is the market value of the shares when he receives the option.
  2. After one year the shares are worth €3 each. Mr. Smart buys the shares at this point.
  3. Six months later the shares are worth €4 each and Mr. Smart sells them all.

What tax does he have to pay?


A. Sale Proceeds:

10,000 shares @ €4

€40,000

B. Cost Price: 

10,000 shares @€1

€10,000

Gain made by Mr. Smart

 

€30,000

For tax purposes this gain is divided into two parts. The first part applies when the option was exercised. He made a paper profit of €20,000 at this point. This is calculated as follows:


Cost of Shares;10,000 shares @€1 =

€10,000

Value of Shares;10,000 shares @€3 =

€30,000

Paper Profit:

€20,000

This paper profit is immediately liable for income tax and must be paid over to the Revenue within 30 days of exercising the option.
Assuming the 41% tax rate applies this gives a tax charge of €8,200. From 2011 onwards PRSI and the USC charges also apply.

The second part of the tax charge arises when the shares are sold. Mr. Smart made an overall gain of €30,000. He has already paid income tax on €20,000 and then pays capital gains tax on the remaining €10,000 gain. Using the 25% capital gains tax rate and ignoring the annual exemption the tax charge amounts to €2,500.

In summary Mr. Smart made a total gain of €30,000 on which he paid tax of €10,700. The tax rules for dealing with share options are complex and depend on the type and terms of the scheme involved. There are many different types of share option schemes. Broadly speaking, the different schemes are divided into Unapproved Share Option Schemes (means not approved by the Revenue Commissioners) and Approved Share Option Schemes (means the scheme has Revenue Approval). 

For unapproved schemes there are strict deadlines for when the tax is due and for the declaration of details regarding share options to the Revenue. If these dates are missed, interest and penalties can arise. Independent professional advice should be obtained when dealing with share options to ensure all matters are properly dealt with. We can provide this service at an additional charge.
Where an employee benefits from an Unapproved Share Option Scheme they are obliged to make tax returns under our Self Assessment Tax System. 
Apart from Unapproved Share Option Schemes the other type of schemes generally fall within the following categories;

  • Revenue Approved Share Option Schemes
  • Share Subscription Schemes
  • Approved Profit Sharing Scheme
  • Employee Share Ownership Trusts
  • Save As You Earn Schemes

The rules and regulations for these schemes will normally be explained by your employer.

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