Being granted Share Options by your employer can lead to a significant windfall for you. Quite often employees receive these options not really knowing what they are and, most importantly, the tax obligations associated with these options.
Being granted a share option will usually trigger two taxable events for you. Income tax when you receive/trigger the option to buy the shares and Capital Gains Tax when you sell the shares on to somebody else.
So firstly, what are share options??
A share option is a right granted by a company to its employees or directors to acquire shares in it or other companies at a pre-determined price which is usually less than the current market value.
There are several different types of share option schemes out there but generally they are broken in to two categories:
Approved Share Option Schemes – These are schemes which have been reviewed and approved by the Revenue Commissioners. These schemes qualify for beneficial income tax treatment in certain cases. A current list of the Approved schemes is available on the Revenue website
Unapproved Share Option Schemes – These are essentially all other share option schemes which do not qualify as approved share option schemes. Any income tax which arises in respect of an unapproved share option scheme must be calculated and paid over to Revenue by the employee.
So what income tax do you need to pay on these unapproved share options and when?
Essentially you will pay income tax on the difference between the price which you pay to acquire the shares i.e. the “option price” and the market value of the shares if an independent third party were to buy them.
For example, if you were granted an option to buy 500 shares at €2 and the market value of these shares was €5 then there is a benefit to you of €3 per share or €1,500.
You pay Income Tax on this €1,500 within 30 days of triggering the option to buy the shares.
The employee will need to file an RTSO 1 form with this payment outlining details of the calculation of the taxes due.
The employee will also have to file an Income Tax return for the tax year in which they triggered the option even if no further taxes are due.
So what happens when I eventually sell the shares?
When you eventually decide to sell the shares you will pay Capital Gains Tax on the difference between the money you receive for the shares when you sell them and the market value of the shares when you triggered the option to buy them.
Taking our example above a step further if you decided to sell the shares a year later when the market value was €10 per share you would have made a gain of €5 per share i.e. €10 sales price - €5 market value when you triggered to option.
If you sold all 500 shares then your total gain would be €2,500.
The first €1,270 of gains made by any individual in a tax year are exempt from Capital Gains Tax and so the taxable capital gain is €1,230 i.e. €2,500 - €1,270.
The current Capital Gains Tax Rate is 33% so your tax bill would be €405.90
If the shares are sold on or before 30 November CGT is due by 15 December in the same tax year, while if the shares are sold during the month of December the payment date is 31 January in the following year.
Details of the calculation of the Capital Gain must also be included on the Income Tax return of the employee for the tax year that the gain was made.
By Louise Perry