IT72
Tax treatment of shares acquired
by employees and directors under
Unapproved Share Option Schemes
RPC004963_EN_WB_L_1
1.Introduction
1.1Overview
This Explanatory Leaflet is aimed at the individual who is in receipt of share options from his/
her employer under an unapproved share option scheme.
1.2 What is a Share Option?
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.
1.3 The two categories of share option schemes
Share options are divided as to:
(a) ‘approved’ share options schemes (i.e. approved by the Revenue Commissioners for
various purposes of the Taxes Consolidation Act 1997) under which the gains accruing
on the grant and exercise of the options are, with some exceptions, exempt from
income tax; and
(b) ‘unapproved’ share options (i.e. all other share option schemes) under which the
gains accruing on the grant and exercise of share options are chargeable to tax under
Schedule E. This leaflet relates only to unapproved share option schemes.
1.4 Purpose of this leaflet
The purpose of this leaflet is to outline:
(a) the income tax treatment of the gain arising on the exercise of a share option under an
unapproved share option scheme; and
(b) the CGT (Capital Gains Tax) treatment on the gain arising on the sale of shares
acquired under an unapproved share option scheme.
2. Income tax treatment of shares acquired under an unapproved share
option scheme
2.1 Types of share options
There are two types of share option:
(a) a ‘short option’ - which must be exercised within seven years from the date it is granted;
and
(b) a ‘long option’ - which can be exercised later than seven years from the date it is
granted.
2.2 How is income tax charged on ‘short options’?
In the case of ‘short options’, the charge to income tax arises only at the date of exercise
of the option. The amount of the gain chargeable to income tax on the exercise of a share
option is the difference between:
(a) the market value of the share(s) at the time 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.
Example
Mr X was granted a share option on 6 May 2010 under the terms of which the share option
must be exercised before 1/12/2016. This is a ‘short option’ as it must be exercised within 7
years of the date of grant.
Date share option granted
Exercise Price
Market Value at 6/5/2010
Number of Shares
Date share option exercised
Market Value at 10/5/2013
6/5/2010
€2.00 per share
€2.00 per share
500
10/5/2013
€5.00 per share
2010
No income tax at the date of grant as the option is a ‘short’ option (i.e. the tax is
due on the exercise rather than on the grant of the option).
2013
Value of each share on exercise €5.00 less amount paid €2.00
Gain = €3.00 per share
Total charge €3.00 X 500 = €1,500 at individual’s marginal rate of tax.
If the individual’s marginal rate of income tax is:
a
20%, then the income tax due is €300;
a
41%, then the income tax due is €615.
2.3 How is income tax charged on ‘long options’?
Where a share option is capable of being exercised later than seven years after it is
obtained, a charge to income tax may arise on both:
(a) the grant of the share option; and
(b) on the exercise, assignment or release of the share option with a credit given for the
income tax charged on the grant of the share option against the income tax due on the
exercise, assignment or release of the share option.
This charge at the date of grant of the share option is calculated on the difference between:
(a) the market value of the share(s) at the date the share option is granted; and
(b) the consideration for which the share(s) may be obtained on the exercise of the share
option. (If this consideration is variable the least amount of the consideration is taken
into account.)
Example
Mr Y was granted a share option on 6 May 2008 under the terms of which the share option
may be exercised anytime up to 5 May 2018 (i.e. more than seven years after grant). This is
a ‘long option’.
Date share option granted
Exercise Price
Market Value at 6/5/2008
Number of Shares
Date share option exercised
Market Value at that date
2008
6/5/2008
€5.00 per share
€5.50 per share
1000
4/5/2010
€10.00 per share
Value of each share at date of grant of the option €5.50 less option price payable
on exercise €5.00
Notional gain = €0.50 per share
Total charge €0.50 X 1,000 = €500 at individual’s marginal rate of tax.
If the individual’s marginal rate of income tax is:
2010
a
20%, then the income tax due is €100;
a
41%, then the income tax due is €205.
Value of each share at date of exercise of the option €10.00 less option price paid
on exercise €5.00
Gain = €5.00 per share
Total charge €5.00 X 1,000 = €5,000 at individual’s marginal rate of tax.
If the individual’s marginal rate of income tax is:
a
20%, then the income tax due is €1,000 less the tax paid in 2008;
a
41%, then the income tax due is €2,050 less the tax paid in 2008.
As set out above, any income tax charged on the grant of the share option is deductible from
any income tax that is subsequently charged when the share option is exercised, assigned or
released. In this instance, the individual would receive a deduction for either €100 or €205
income tax paid in 2008 from the liability to income tax in 2010.
2.4 In which tax year will a charge to income tax arise?
The charge to income tax arises for the tax year in which the share option is exercised,
assigned or released. In addition, in the case of a ‘long option’, the charge to income tax
may also arise for the tax year in which the share option is granted.
3. What is the income tax position if I exercise my options by way of a
‘cashless exercise’?
A ‘cashless exercise’ is the term given to an exercise of options whereby the employee or
director does not provide any cash to exercise the shares but rather requests the company
to sell the shares in order to finance the original exercise. This is also referred to as a
same day sale exercise. In some instances, only some of the shares are sold to acquire
the balance of the shares under option. Notwithstanding that the exercise is described as a
‘cashless exercise’, the income tax position remains the same.
Example
Ms. A was granted a share option on 6 May 2008 under the terms of which the share option
must be exercised before 1/12/2012. This is a ‘short option’ as it must be exercised within 7
years of the date of grant.
On 10 May 2010, Ms. A instructed her employer company to sell all her shares and she
agreed to pay for her shares out of the proceeds of the sale.
Date share option granted
Exercise Price
Market Value at 6/5/2008
Number of Shares
Date share option exercised
Market Value at 10/5/2010
6/5/2008
€2.00 per share
€2.00 per share
500
10/5/2010
€5.00 per share
2008 No income tax at the date of grant as the option is a ‘short’ option (i.e. the tax is
due on the exercise rather than on the grant of the option)
2010
Value of each share on exercise €5.00 less amount paid €2.00
Gain = €3.00 per share
Total charge €3.00 X 500 = €1,500 at individual’s marginal rate of tax.
If Ms. A’s marginal rate of income tax is:
a
20%, then the income tax due is €300;
a
41%, then the income tax due is €615.
4. Relevant Tax on a Share Option (RTSO)
4.1General
The income tax due on the exercise of a share option is known as RTSO (Relevant Tax on a
Share Option).
4.2 When must RTSO be paid?
RTSO must be paid to the Collector-General not later than 30 days after the date on which
the share option is exercised.
4.3 How do I calculate the amount of RTSO due?
RTSO is payable on the difference between:
(a) the market value of the share(s) at the date of exercise of the share options; and
(b) the option price.
Note: The RTSO due is calculated at the higher rate of income tax in force for the year of
assessment in which the share option is exercised (currently 41%) - but see Par. 4.4 below.
In the case of a long option, any amount of income tax paid on the grant of the share option
can be deducted from the amount of income tax to be paid on exercise of the share option.
Example
Ms. C is granted a share option on 10/7/2010. The terms under which the share option was
granted confirm that it must be exercised before 5/5/2013. Therefore, this is a short option.
Ms. C exercises the share option on
Market value of shares at 1/3/2013
Exercise price (i.e. price paid by Ms. C)
Share option gain
Amount of RTSO due (€20,000 at 41%)
Latest date for payment of RTSO
1/3/2013
€50,000
€30,000
€20,000
€8,200
31/3/2013
4.4 What is the position if I am only liable to income tax at the standard rate of income
tax?
If you consider that your income from all sources for the year of assessment will be
chargeable at the standard rate of income tax (currently 20%) only, a written application can
be made to the Revenue office dealing your tax affairs seeking approval to pay RTSO at
the standard rate of income tax. This approval must be obtained in advance of making the
payment of RTSO calculated at the standard rate of income tax and the RTSO must be paid
to the Collector-General not later than 30 days after the date on which the share option is
exercised.
4.5 How do I pay the RTSO due?
A Form RTSO1 is used for the purpose of making an RTSO payment to the CollectorGeneral. This form is available on the Revenue website
www.revenue.ie/en/tax/it/forms/rtso1.pdf or can be obtained by phoning LoCall
1890 20 30 70.
4.6 What if I fail to pay the RTSO due?
As with other tax liabilities, interest is due on late payment.
4.7 Are there any instances in which RTSO is not due?
There is currently only one type of Revenue approved share option scheme i.e. an approved
Savings-Related Share Option Scheme
Where the conditions of an approved Savings-Related Share Option Scheme are complied
with at both the date of grant of the share option and at the date of exercise of the share
option, a charge to income tax does not generally arise on the exercise of the share option
and therefore no liability to RTSO arises.
However an income tax charge will arise on the exercise of a share option granted under a
Revenue approved Savings-Related Share Option Scheme, if, following a takeover, a share
reconstruction or a voluntary winding up, etc. of the company (i.e. the company that has
granted the share option), the option is exercised within three years from the date of grant.
RTSO is due and payable to the Collector-General within 30 days of the relevant event in
respect of any gain arising.
4.8 Can I pay RTSO by way of EFT (Electronic Funds Transfer)?
Individuals based outside of the State can pay RTSO by means of an EFT. Details relating to
the provision of this service are available from:
Money Transmission Section,
Collector-General’s Division,
Sarsfield House,
Limerick.
Telephone: + 353 61 488109
Fax: + 353 61 488674
E-mail: moneytrans@revenue.ie
4.9 Where can I get further information on RTSO?
Further information is available in the Revenue Leaflet CG 16
www.revenue.ie/en/tax/it/leaflets/rtsoa.pdf
Any enquiry regarding the calculation of RTSO should be addressed to your local Revenue
office. Any enquiry regarding payment of RTSO should be directed to the Collector-General’s
Division - telephone LoCall 1890 20 30 70.
5. Preliminary Tax
5.1General
If you have income other than salary from which tax under the PAYE system was deducted,
an estimate (known as ‘preliminary tax’) of the tax due on that other income is due during the
tax year.
In calculating your preliminary tax you should remember that it includes PRSI and USC. See
paragraph 9 Miscellaneous for further information in regard to PRSI and USC.
5.2 Amount of preliminary tax due
The amount of preliminary tax you must pay to avoid interest charges is the lower of:
a
90% of your final income tax liability for the current tax year; or
a
100% of your final income tax liability for the immediately previous year; or
a
105% of your final income tax liability for the year preceding the immediately previous
year. This option is only available where you authorise the Collector-General to collect
income tax by direct debit. The 105% rule does not apply where the income tax
payable for the pre-preceding year is NIL.
More detailed information is contained in the Revenue Leaflet IT 10
www.revenue.ie/en/tax/it/leaflets/it10.html.
Is there any interaction of preliminary tax and RTSO?
The RTSO due on the gain arising from the exercise of a share option in a tax year is
payable within 30 days of the date of such exercise. The RTSO payable is separate and
distinct from preliminary tax and, therefore, is not considered for the purposes of:
a
determining the amount of preliminary tax payable for the relevant year of assessment;
a
the calculation of the margin of error regarding preliminary tax paid in respect of a year
of assessment in which the share option is exercised; and
a
determining whether the preliminary tax 90%, 100% or 105% rule has been satisfied in
relation to the payment of preliminary tax.
The RTSO paid may, however, be used to satisfy the individual’s overall income tax liability
for the tax year (i.e. it can be credited against the individual’s final income tax liability
including the liability relating to the gain on the exercise of the share option).
6. Deferral of income tax (RTSO) due
6.1 Can I defer the income tax charge on the exercise of the share option?
There is currently no provision to defer the income tax due on the exercise of a share option.
Provision was made for an individual to elect to defer payment of the income tax payable
on the gain arising on the exercise of a share option where the share option was exercised
between 6/4/2000 and 28/3/2003. This option to defer is no longer available.
6.2 If I opted to defer the payment of income tax on options exercised between 6/4/2000
and 28/3/2003 and sell the shares acquired on exercise of the share option before the
end of the deferral period, how do I identify the shares on which the income tax must
be paid?
Where the charge to income tax has been deferred, it is necessary to identify the actual date
of sale of the shares on which the income tax has been deferred as this is the date used
to establish when the deferred income tax charge becomes due and payable and also the
date from which interest runs. As set out above, it is a requirement that a person identify
the shares on which the income tax has been deferred. Where the share ownership is
evidenced through:
(a) holding share certificates; or
(b) being registered as an owner on the CREST system,
shares on which income tax has been deferred will be identified using the FIFO (‘first in first
out’) rule. However, the FIFO rule does not apply if the relevant shares are sold in the same
year of assessment in which the option is exercised in respect of those relevant shares. For
share identification purposes, all the provisions in relation to CGT will apply.
7. Tax Returns
7.1 If I exercise a share option, do I have to file a tax return?
Persons in receipt of share options are chargeable to income tax under the self-assessment
system in respect of the gain arising from the exercise, assignment or release of share
options except where the person has been exempted from the requirement to make a
return by reason of a notice given by an Inspector of Taxes to exclude a person from the
obligation to make a return. Where this occurs, the person is advised by notice in writing of
the exclusion and the notice will specify the length of the exclusion. This exclusion does not
extend to removing the obligation to make a return where a person has a liability to CGT for a
chargeable period. A late filing surcharge arises where the income tax return is not submitted
by the relevant due date for the relevant tax year even where all the person’s other income is
solely within PAYE (Pay As Your Earn) system. More detailed information is contained in the
Revenue Leaflet IT 10 www.revenue.ie/en/tax/it/leaflets/it10.html
7.2 Do I have to submit a tax return even if I pay the RTSO?
When a share option giving rise to an income tax liability has been exercised, a tax return
for the relevant tax year must be made. The tax return should include details of your income
from all sources for the tax year of assessment in which the option is exercised, including the
gain on the exercise of the share option. The RTSO already paid will be set against the total
income tax liability for the year.
8. CGT (Capital Gains Tax)
8.1General
An individual who acquires any shares by the exercise of a share option is chargeable to
CGT on any chargeable gain realised on the subsequent disposal of those shares. The tax
is due on the difference between:
(a) the sale price of the shares; and
(b) the acquisition cost of the shares.
The acquisition cost of the shares for CGT purposes is calculated as follows:
Where the shares are issued on the exercise of the option:
Regardless of when the options are exercised the cost of acquisition is the sum of the
following:
•
The cost (if any) of the option,
•
The price paid for shares on exercise of the option, and
•
The amount charged to income tax on the exercise of the option.
Where the shares are already in existence at the time of exercise of the option:
For options exercised before 12/12/2002, the cost of acquisition is the sum of the following:
•
The cost (if any) of the option,
•
The price paid for shares on exercise of the option, and
•
The amount charged to income tax on the exercise of the option.
For options exercised on or after 12/12/2002, the cost of acquisition is the market value of
the shares at the time of exercise.
Examples
Ms D by virtue of her employments is granted share options under an unapproved share
option scheme. The value of the options at time of grant is nil. A few years later, when the
market value of the shares is €15,000, Ms D exercises her option and acquires shares for the
exercise price of €10,000. Ms. D immediately sells the shares for €15,000.
(1) Where shares are issued on the exercise of the option or shares are already in
existence and the option is exercised before 12/12/2002:
Disposal proceeds:
Less
Costs of acquisition:
Cost of option
Cost of shares at time of acquisition
Amount charged to income tax
Capital Gain
€15,000
NIL
€10,000
€ 5,000
€15,000
NIL
(2) Where shares are already in existence and the option is exercised on or after
12/12/2002:
Disposal proceeds
Less
Costs of acquisition:
Market Value of shares at time of acquisition
Capital Gain
€15,000
€15,000
NIL
There is no question of adding the amount charged to income tax to the market value
of the shares.
8.2 When is the CGT due for payment?
For 2009 and subsequent years the payment dates are as follows:
•
If the shares are sold on or before 30 November CGT is due by 15 December in the
same tax year,
•
If the shares are sold during the month of December the payment date is 31 January in
the following year.
8.3 Is there any relief for indexation when the shares are sold?
For disposals made on or after 1 January 2003 indexation relief will only apply for the period
of ownership of the shares up to 31 December 2002. More detailed information is contained
in the Revenue Leaflet CGT 1 on www.revenue.ie/en/tax/cgt/leaflets/cgt1.pdf
8.4 Is there any exemption from CGT?
The first €1,270 of an individual’s net gains (i.e. gains less losses, including losses brought
forward from earlier years) on the disposal of the shares is not chargeable to CGT. This
exemption is not transferable between spouses (e.g. if one spouse does not fully use the
exemption he/she cannot transfer the unused part to the other spouse). This exemption
applies to individuals only.
Example
Ms. E exercises her share options on 1/12/2012. The market value of the shares on that
date is €22,000. The exercise price is €10,000. The amount of the gain chargeable to
income tax is €12,000 for the tax year 2012. Ms. E sells the shares for €25,000 on 1/6/2013.
(The shares were already in existence when the option was exercised)
Sales proceeds
Market Value of shares
Gain
€25,000
€22,000
€ 3,000
Exemption (assuming not already used)
Gain chargeable to CGT
CGT payable by 15/12/2013 @ 33%
€1,270
€1,730
€570.90
There is no question of adding the amount charged to income tax (€12,000) to the
market value of the shares.
8.5 How do I identify the shares I have sold?
Where a person holds shares of the same class which have been acquired at different dates,
the shares acquired at the earlier time are deemed to be disposed of first. This is usually
referred to as the FIFO (‘first in first out rule’). More detailed information is contained in the
Revenue Leaflet CGT1 on www.revenue.ie/en/tax/cgt/leaflets/cgt1.pdf
8.6 Is there any change to the identification rules where shares are sold by way of a
cashless exercise?
The FIFO rules are modified in any case where shares of the same class are bought and
sold within a period of four weeks. Where shares are sold within four weeks of acquisition
the shares sold are identified with the shares acquired within that period. Furthermore,
where a loss accrues on the disposal of shares and shares of the same class are acquired
within a four-week period, the loss is not available for offset against any other gains
arising. Instead the loss is only available for set off against any gain that might arise on the
subsequent disposal of the shares so acquired. This provision does not apply where there is
a gain on the disposal. More detailed information is contained in the Revenue Leaflet CGT 1
on www.revenue.ie/en/tax/cgt/leaflets/cgt1.pdf
9.Miscellaneous
9.1 Will I pay income tax on dividends received on shares acquired as a result of the
exercise of share options?
When you exercise the share option and acquire the shares you will have the same
entitlements as all other shareholders in the company including the entitlement to dividends.
Income tax will arise on dividends received. Details of the dividends received including any
tax deducted must be included on your annual return of income each year.
9.2 How do I notify the tax office of the number of share options exercised, exercise price,
etc.?
A panel is included on the tax return form (Form 12 for PAYE customers or Form 11 for SelfAssessment customers) requesting information in relation to share options.
9.3 Will I pay PRSI and Universal Social Charge on the exercise of share options?
The gain on the exercise of share options is reckonable income for PRSI and USC purposes.
9.4 What happens if I die before I have exercised the share option?
Your legal personal representative will need to contact the company to establish if the share
options can be exercised in accordance with the rules of the scheme and if they can be
exercised the period of time allowed for exercise. If they can be exercised the gain on the
exercise of the share option is included as income and liable to income tax in the year of
assessment of your death.
9.5 What happens if my company is taken over by another company?
This will depend on the rules of the share option scheme and the company effecting the take
over. The company will normally contact you when the transaction has been negotiated to
advise you of the position.
9.6 What happens if I relinquish my right to shares for cash?
Any cash payment is chargeable to income tax and should be paid through the company
payroll and is subject to PAYE deductions (tax, PRSI, and USC) in the normal manner.
9.7 If I assign the share option to some other person, is there an income tax charge?
Yes. If you assign your share option to some other person, the gain arising on the exercise,
assignment or release of a share option will still arise to you and you are liable to income tax
on the gain. In addition, the assigning of your shares may give rise to CGT.
9.8 What if the exercise price of the share option is denominated in a currency other than
euro?
The exchange rate applying to the currency of the other country on the day of the exercise,
assignment or release of the option must be used to calculate the gain arising on the
exercise, assignment or release of the share option.
9.9 What if I have spent a period working outside Ireland between the date of grant of the
option and the date of exercise of the option?
Please see Revenue’s Statement of Practice SP-IT/1/07
9.10 How will I value the shares on the date of exercise of the share option if the shares are
in an unquoted company?
The company will generally provide you with details of the value of the shares on the date of
exercise of the share option.
9.11 What if I got the share option before I commenced employment with the company
concerned or after I left?
A charge to income tax arises even if the share option is granted before the employment
commences or after the employment ceases if it is granted by reason of the individual’s office
or employment.
9.12 Will the gain assessable to income tax impact on my pension plan?
Any amount of the gain on the exercise, assignment of release of a share option, assessable
to income tax can be taken into account to calculate your percentage limits for your pension
plan.
Further Information
This leaflet is for general information only. For further information you can contact your
Revenue Regional Office whose LoCall number is listed below (within ROI only). Please
note that the rates charged for the use of 1890 (LoCall) numbers may vary among different
service providers.
Border Midlands West Region
Cavan, Donegal, Galway, Leitrim,
Longford, Louth, Mayo, Monaghan,
Offaly, Roscommon, Sligo, Westmeath
1890 777 425
East & South East Region
Carlow, Kildare, Kilkenny, Laois, Meath,
Tipperary, Waterford, Wexford, Wicklow
1890 444 425
Dublin Region
Dublin (City and County)
1890 333 425
South West Region
Clare, Cork, Kerry, Limerick
1890 222 425
If calling from outside the Republic of Ireland, the contact number is + 353 1 865 5000. You
can also view more comprehensive contact details on Revenue’s website at
www.revenue.ie/en/contact/index.html. This leaflet is intended to describe the subject in
general terms. As such, it does not attempt to cover every issue which may arise in relation
to the subject. It does not purport to be a legal interpretation of the statutory provisions and
consequently, responsibility cannot be accepted for any liability incurred or loss suffered as a
result of relying on any matter published herein.
Revenue Commissioners
IT72 July 2014
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