Tax on 'unapproved share options' ?

ZoZoZo

Hi,

Anyone familiar with this topic ? I'm finding the information on revenue.ie very hard to believe (https://www.revenue.ie/en/additional-incomes/employment-related-shares/unapproved-share-options.aspx). For short options it says:


Short option

This option must be exercised within seven years from the date it is granted.
When you exercise a short option, you might pay IT on any gain you make. You will only pay IT if the option price is less than the market value of the shares at the grant date. The amount of the gain is the difference between:

• the market value of the shares when you buy them
• the amount you paid for the shares (plus any amount paid for the grant of the option).

So, this is saying that if the share price was €10 in 2015 and I was granted options that last 6 years to buy shares to buy at €10 (not below market value on grant date) and I exercise them in 2020 when the market value has risen to €210 then I pay no IT despite having made a gain of €200 per share. How can this be correct ? I'd be very happy if it was but I just find it hard to believe, how is this €200/share gain I have been handed any different from income from any other source, why no IT liability?

It's also not clear why the difference between short and long share options should be so stark, for long options you effectively pay IT on the full difference between grant price and market value on the exercise date (which to be honest is what I would expect for both short and long options because at the end of the day it is all just extra income you're being given in both cases). So does anyone know, is the revenue.ie website just wrong or am I mis-understanding something ?

Thanks,

Zozo

Ciaran

The market value when you buy the shares is €210 and the amount you paid is €10 so you pay tax on the difference of €200 if you exercise the option. For short options, the price when you're granted the option doesn't matter.

ZoZoZo

Ciaran wrote: »

The market value when you buy the shares is €210 and the amount you paid is €10 so you pay tax on the difference of €200 if you exercise the option. For short options, the price when you're granted the option doesn't matter.

''the price when you're granted the option doesn't matter.' Well that is what I would expect however its not what the revenue website says:
See https://www.revenue.ie/en/additional-incomes/employment-related-shares/unapproved-share-options.aspx

This link got mangled in my original post above but for clarity I'll also paste what it says here:



So, do the revenue have it wrong ? And if so then what source can I consult to get the correct info if revenue themselves don't understand the rules ?

Thanks,

Zozo

tjhook

ZoZoZo wrote: »

So, this is saying that if the share price was €10 in 2015 and I was granted options that last 6 years to buy shares to buy at €10 (not below market value on grant date) and I exercise them in 2020 when the market value has risen to €210 then I pay no IT despite having made a gain of €200 per share. How can this be correct ?

In this case, you pay no income tax. But you pay capital gains tax on the gain, i.e. cgt on a gain of €200.

At least that's how it used to work. I assume it still does.

Ciaran

ZoZoZo wrote: »

''the price when you're granted the option doesn't matter.' Well that is what I would expect however its not what the revenue website says:
See https://www.revenue.ie/en/additional-incomes/employment-related-shares/unapproved-share-options.aspx

This link got mangled in my original post above but for clarity I'll also paste what it says here:



So, do the revenue have it wrong ? And if so then what source can I consult to get the correct info if revenue themselves don't understand the rules ?

Thanks,

Zozo

That looks to be wrong. Section 3.4.5 of the share scheme manual has an example of the same situation you had charging income tax on the difference between the market value at exercise and the amount paid.

tjhook

Ciaran wrote: »

That looks to be wrong. Section 3.4.5 of the share scheme manual has an example of the same situation you had charging income tax on the difference between the market value at exercise and the amount paid.

I think we're all in agreement, and also in agreement with both Revenue documents referenced.

From the OP:

So, this is saying that if the share price was €10 in 2015 and I was granted options that last 6 years to buy shares to buy at €10 (not below market value on grant date)

From the Revenue image pasted by the OP:

You will only pay IT if the option price is less than the market value of the shares at the grant date

From Section 3.4.5 of the Share Scheme Manual:

The amount of the gain chargeable to income tax on the exercise of a short option is the difference between:(a)the market value of the share(s) at the date of acquisition; and(b)the aggregate amount or value of the consideration, if any, given for the share(s) and for the grant of the share option.

I.e. in the OP's example, he paid market value for the share options. So no IT due. But any gain after the date of granting is likely to be exposed to GCT. (Although he may have €1270 tfa before paying anything).

Ciaran

tjhook wrote: »

I.e. in the OP's example, he paid market value for the share options. So no IT due. But any gain after the date of granting is likely to be exposed to GCT. (Although he may have €1270 tfa before paying anything).

That's not what the example in the manual says.

Example 2
Thomas was granted a share option on 6 May 2017 under the terms of which the share option must be exercised before 1 December 2019. This is a ‘short option’ as it must be exercised within seven years of the date of grant.

Date share option granted 6 May 2017
Exercise Price €2.00 per share
Market Value at 6 May 2017 €2.00 per share
Number of Shares 500
Date share option exercised 10 May 2018
Market Value at 10 May 2018 €5.00 per share
There is no charge to income tax at the date of grant as the option is a ‘short’ option.
At the date of exercise, the taxable gain is calculated as follows:
Market value of shares at date of exercise €2,500
Less option price paid €1,000
Income gain €1,500
The total gain subject to income tax at the date of exercise is €1,500 (€3.00 per share x 500 shares).

So the gain is the difference between the price paid and the value at date of exercise.