How Share Options are Taxed?
Share options are generally granted by Public Companies to employees. There are a variety of employee share option schemes and the tax treatment depends on the terms of same and if the scheme has been approved by the Revenue Commissioners. The RTSO1 form is used to make tax payments on share options.
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 to the tax treatment of employee share option schemes and how the share options 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 is the RTSO1 Form?
The RTSO1 form is to be used for the purpose of making a Relevant Tax payment, on a Share Option and associated Universal Social Charge and PRSI, to the Collector-General.
What Happens If I Make a Gain on Share Options?
How the tax rules operate is best explained by the following example:
- 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.
- After one year the shares are worth €3 each. Mr. Smart buys the shares at this point.
- Six months later the shares are worth €4 each and Mr. Smart sells them all.
What tax does he have to pay on the share options?
|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 share 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|
How to Calculate your RTSO1 Share Option Tax
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 40% tax rate applies the tax on the share options is €8,000. From 2011 onwards PRSI (4%) and the USC (8%) charges also apply. This gives the total tax bill of €10,400. The Revenue form RTSO1 is used for the purpose of making a Relevant Tax on a Share Option payment.
Click Here to download your RTSO1 Form from Revenue. This form is used for making payments for the Relevant Tax on a Share Option to Revenue. The RTSO1 form Must be completed and submitted to Revenue within within 30 days of the exercised date. When calculating the Tax liability on your share options income tax , PRSI and USC at the highest rate should be included.
Where an employee benefits from an Unapproved Share Option Scheme a Self Assessment Tax Return Form 11 for the relevent year MUST be made.
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Capital Gains Tax (CGT) on Share Options
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 current 33% capital gains tax rate and ignoring the annual exemption the tax charge amounts to €3,300.
In summary Mr. Smart made a total gain of €30,000 on which he paid tax of €13,700.
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 advice on this matter by way of consultation.
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.
See Also Capital gains tax