What tax must I pay on share options from employer?

The company that I have worked with for the last 10 years is in the process of being sold to a foreign owner. The company will be registered abroad and continue to operate in Ireland.

Under the terms of the sale, any eligible staff must exercise any unused share options they have, prior to the sale. I have some accumulated options, and have not ever exercised options to date.

What are my tax implications ?

Mr SD, email

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Share options are increasingly a part of companies’ remuneration packages as they look to attract talent in an ever-tighter recruitment market, especially post-Covid.

However, as your example shows, they are not just a recent phenomenon. They have been common, particularly among multinational employers, for many years now.

There are various different types of schemes which can broadly be divided between Revenue approved schemes and unapproved schemes. Being unapproved is not a problem but each one has particular tax arrangements.

Revenue approved schemes can be one of three types: save as you earn arrangements; approved profit share schemes; and employee share ownership trusts.

Grant of options

We might look at them another day but, despite the rather vague reference in your letter, I think you are referring to an unapproved share option scheme.

This is where an employer grants you the right to purchase shares in the business. You might not pay for them at all, in which case they are called “nil option”, or you might have the right to buy them at a predetermined option price.

The documentation will have let you know how many shares you have the right to acquire, what price if any that you will have to pay and when you can exercise your option.

There are a further two factors at play which affect the tax position: is this a short option or a long option?

A short option is one that must be exercised within seven years of being granted; a long option is one that can only be exercised more than seven years after being granted.

Given you have been there for the past 10 years, I am assuming the options in your case are the latter but we’ll look at both.

It is worth mentioning there is never an obligation to purchase the shares; you simply have the option to do so. It is always open to you simply to let the share option lapse.

If you take a situation like now, where some shares have fallen sharply because of the war in Ukraine, the rise in the cost of living, rapidly increasing energy prices, or simply company performance that underwhelms the market like Netflix’s recent quarterly results, the shares on which you have options could be trading below their option price.

Tax position

Assuming you are going to exercise your options, there are going to be taxation issues. As your employer is obliged to notify the Revenue Commissioners when the option was granted, ignoring the tax issue is certainly not an option.

When you exercise an option, you will face a bill for income tax, universal social charge (USC) and PRSI. The first two – income tax and USC – are known as the relevant tax on share options (RTSO). It’s a cumbersome acronym but my use of it will become clear in a minute.

The tax is due on the difference the market value of the shares on the date you exercise the option and any amount you paid for the shares. If you also paid something for the grant of the option originally, this is also deductible.

As a default, the income tax rate due is 40 per cent. If you pay tax at the standard rate of 20 per cent, you need to proactively apply to Revenue via myAccount or in writing to your local tax office for approval to pay only this rate (and any lower USC charge).

More importantly, you need to inform the Revenue of your action in exercising the share option. And yes, your employer will be doing this anyway so there’s no point in putting it off.

You have just 30 days from the time you exercise the option to file what is called Form RTSO1, outlining the data you exercised your option, your gain and the tax liability. You also have to pay any tax due in this 30-day window, or face the prospect of interest charges. Although the employer has notified Revenue of the action, these taxes will not be deducted at source, like your normal PAYE earnings, so you have to do it yourself.

You are also obliged to file a Form 11 annual tax return for any year in which you exercise share options.

On occasion employees will ask their employers to sell the shares for them so that they can access funds to meet the tax bill. If you do, you will also need to put that detail down on the Form 11.

Long options

The process above is the same whether you are dealing with short options or long options. The additional potential issue with long options is that you might also have to pay income tax back at the time the share option was granted – if the option price was lower than the market price of the shares on that date.

In that case the tax due at this point would be on the difference between the option price and the market price on the day.

In this case, the tax (including USC and PRSI) can be deducted by your employer through the PAYE system and paid by them to Revenue. Any tax you have to pay at this point will be deducted from your tax liability when the share option is later exercised.

From the limited detail in your letter, this was not an issue for you.

Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2, or by email to dominic.coyle@irishtimes.com. This column is a reader service and is not intended to replace professional advice