US Citizen Living in U.K. Exercising Stock Options

[frankdougans]

I’m a U.S. citizen living in the U.K. and work for a U.K. company with a U.S. parent company. I have been awarded US stock options as part of my compensation package and wondering what the tax implications are should I exercise my stock options. Not sure where to start so any advice is much appreciated. I understand that my British citizen colleagues sign a W8BEN to minimise taxation, but not sure I would qualify for this?

 

[nhungthientai]

@frankdougans My understanding is that since you are a US citizen, you have to file US taxes regardless of where you live in the world.

W8BEN is for the rest of us, and is basically a form that says "Pls, Mr US taxman, don't tax me on my dividend income from the stocks I hold in US based corporations, cos I'm not American and I pay taxes in my home country."

I don't think the W8BEN applies to you.

 

[frankdougans]

@nhungthientai Thanks for confirming. I assumed it was probably the way.

As you pointed out, I have to pay taxes in the US so I assume this applies to capital gains tax as well. Now my question is would I have to pay capital gains tax in the U.K. as well? As you pointed out my peers wouldn’t pay in the US as they pay in the U.K. but would I be exempt as I’ve paid capital gains tax in the U.S.?

 

[nhungthientai]

@frankdougans Tricky area this. I hate it when people write this, but im going to do it myself - "get advice from a qualified tax advisor". But TBH, the sheer difficultly of finding someone specialising in this, not to mention the cost, makes this "advice" impractical in real life.

So, what i recommend is.....
Do you prepare tax returns in the UK? If not, then keep quiet and no one will ask. If so, then I'm sure there will be some sort of double taxation treaty between the UK and the US, so you shouldn't be double taxed.

 

[frankdougans]

@nhungthientai Very fair. Thank you!

 

[mfinnergab]

@nhungthientai You had me in the first half.

 

[whitesunshinee]

@frankdougans I get a lot of info from Investments for Expats on subjects like this. I am a UK citizen, however, but I believe there is a double tax treaty between UK and US and there are some forms you can fill out to potentially reduce some taxes. I don't know if you could class it as FEIE?

 

[mfinnergab]

@frankdougans You need to fill out a form W8 with the broker, identifying the US person the RSUs benefit.

The RSU award is taxable on the day that you exercise the options.

• what you benefit are shares
• you will sacrifice around 56% of these to an international tax withholding. I have never found any way to reduce this withholding - it seems to be a legal requirement of your UK employer.
• UK income tax will be calculated and taken away on the entire amount of your income including the value of the RSUs in GBP on the day you exercise.
• My personal recommendation is that you immediately sell the shares after exercise, because then you avoid having to calculate any capital gain/loss in both countries.

You then need to file American taxes later. (This is the easy part. Just file form 1040 and the Form 2555 EZ which reduces your taxable income probably down to zero).

At the end of the UK tax year, fill in HMRC Self Assessment online and include the fact that you received the foreign income in the "foreign" section... and that's where you include the enormous amount of your RSU value that was withheld. You claim this back from HMRC (and if the withholding was in the USA, HMRC takes care of the details).

I get back a huge amount of cash each spring, because that 56% withholding is so much bigger than it needs to be, and my UK employer already PAYEs away all the UK tax I owe from the RSU income.