Should I sell my ESPP shares? UK employees are being given US tax advice, planners warn

Should you sell your ESPP shares? For UK employees there is no tax reason to hold them, financial advisers have told Newspage.

The reason is that the discount is taxed as pay on the day the shares are bought, and any growth after that is capital gains, however long you keep them.

Unfortunately for Brits, much of the current ESPP advice available online explains American tax rules, where holding the shares for one to two years can move most of the gain into lower capital gains rates.

In the UK, by contrast, experts say holding the shares “earns an employee no tax reward at all”.

Instead, the discount is taxed as pay through PAYE on the day the shares are bought, and any growth after that falls under Capital Gains Tax, with the first £3,000 of gains a year exempt and rates of 18% or 24% depending on the employee’s income tax band.

As a result, planners say this makes the sell-or-hold decision a purely investment one, namely how much of your wealth to keep in your employer’s shares.

The difference matters because US technology firms with London offices, including Nvidia, Adobe, Uber and Salesforce, offer staff discounts of up to 15% on their own shares.

Meanwhile, the number of UK employees searching for what to do with them is growing.

How are ESPP shares taxed in the UK?

A UK employee of a US company is taxed differently when using an employee stock purchase plan (ESPP) compared with colleagues in the US.

In the UK, buying discounted shares through the scheme counts as income and goes through PAYE on the day the shares are bought.

Any growth after purchase falls under Capital Gains Tax, with the first £3,000 of gains each year covered by the annual exempt amount, and rates of 18% or 24% depending on the employee's income tax band.

Consequently, UK employees have no tax incentive to hold the shares for an extended period, leaving them with a purely investment decision about how much of their wealth to keep in their employer's shares.

In the US, a sale that meets the plan's holding period rules counts as a "qualifying disposition", which means that holding the shares longer lowers the tax burden by moving a greater proportion of the initial discount into Capital Gains Tax.

By taxing any further gains as a long-term capital gain, this carries a lower rate, according to IRS guidance.

Experts told Newspage that UK employees searching online are often given US answers, and that the discount is taxed as pay however long the shares are kept.

What are the risks of holding ESPP shares?

They said the bigger question is concentration, with salary, career and investments all tied to one company, along with dollar exposure on top, and urged staff to keep every purchase record before they leave a job.

UK staff at US tech firms can buy their employer's shares at up to 15% off, as is standard with ESPPs, but HMRC taxes that discount as income, with income tax and National Insurance usually deducted through payroll.

In contrast, a US colleague in the same plan pays no tax when buying the shares, and can cut their tax bill considerably by holding for one to two years, moving most of the gain to the long-term capital gains rates of 0%, 15% or 20%.

For UK employees, the standard advice to hold the shares for tax reasons falls away, as Capital Gains Tax is charged at the same rate regardless of the holding period.

Dedicated UK tax-free employee share schemes do exist, but they are shrinking, with the number of companies running a Save As You Earn or Share Incentive Plan falling 11% in the last three years, HMRC figures show.

Philip Dragoumis, Director at London-based Thera Wealth Management, a firm advising tech employees, said: "We recommend that clients generally do opt in to their company ESPP schemes. The discount to market price is often attractive and, in some cases, significant.

"Because they are US schemes, unlike the UK Save As You Earn schemes, the discount is taxed as income and subject to income tax and National Insurance.

"Capital Gains tax will be applied to gains after the purchase date using fair market value as the cost basis.

"In terms of whether to keep or sell their shares, advice will be on a case-by-case basis.

"The general recommendation, as always, is to reduce stock-specific risk and avoid having a large percentage of your net worth in one company, especially your employer."

How much of a discount do US employers offer UK staff?

Many large US technology companies with London offices run a share purchase plan, with the discount on shares ranging from 5% to 15%.

Nvidia, Adobe, Uber and Salesforce offer a 15% discount on shares, and Cisco offers up to 15%, according to their latest annual reports.

These discounts are typically taken off the lower of the share price at the start of the offering period or on the purchase day, so if the share price rises, staff pay well below the market price on the day they buy.

Microsoft offers a smaller 10% discount and Oracle offers 5%, but both are calculated on the purchase day, so staff miss out on any share price rise in the interim.

Harvey Dhillon, Founder & CEO at Zmartly, said holding ESPP shares in a US-style plan “earns a UK employee no tax reward at all”.

He added: "The American advice turns on holding periods that change how the IRS taxes the discount, and none of them apply here.

"A US plan isn't one of the UK's tax-advantaged schemes, so the discount is taxed as pay on the day the shares are bought, normally through payroll, however long you keep them.

"Watch for a 'lookback', which sets your price from the share price at the start or end of the offer period, whichever is lower. HMRC taxes the gap between the share's value on purchase day and what you paid, so if the price has risen, that can be far more than the headline discount.

"Check the paperwork, too: if it's actually a UK Sharesave or Share Incentive Plan, tax breaks do apply. In a US plan, each purchase-day value goes into your cost for any later gain, so before you leave a job, download every purchase confirmation while you can still log in."

Should I sell my ESPP shares or hold them?

With no UK tax reward for holding, employees may prefer to sell on the day of purchase to lock in the after-tax discount, as the shares' cost for Capital Gains Tax is set at their value on that day, HMRC guidance shows.

They can then potentially repurchase the shares in a more tax-efficient vehicle, such as an ISA or SIPP.

Nouran Moustafa, Practice Principal & IFA at Roxton Wealth, said: "ESPPs are where Google can get UK employees into trouble very quickly, because so much of the information online is explaining American tax rules.

"For a UK employee in a non-tax-advantaged plan, the discount can be taxed as employment income, with later growth potentially falling into Capital Gains Tax. US Section 423 rules are not UK tax advice.

"My starting question is simple: if your employer gave you the cash today, would you use it to buy this much of their stock? If not, holding automatically makes little sense. Your salary, career and investments can all end up tied to one company, with dollar exposure on top.

"Selling immediately can reduce concentration risk. Holding may suit someone who consciously wants that exposure. When leaving, review the plan rules, tax position and concentration rather than forgetting the shares exist.

“An employee share discount is a benefit. Turning it into an accidental investment strategy is not.”

Your questions answered

Questions answered by Philip Dragoumis, Director and Owner at London-based Thera Wealth Management, a firm advising tech employees.

What is an ESPP, and how does the discount actually work?

An employee Stock (or share) Purchase Plan (ESPP) is an incentive used by US firms to motivate their employees to save regularly into the company stock.  Every month (or other set period) you set aside  a percentage of your salary, which at the end of the period is used to buy stock at a discount to the price in the market  (usually around 10% or more).  Sometimes there are special provisions where the discount is applied to the lowest traded price over the period. It's a valuable benefit and worth taking advantage of. 

How is an ESPP taxed in the UK, when you buy the shares and when you sell them?

There are no tax breaks in the UK unfortunately for ESPPs (unlike the UK version which is called Save as You  Earn -or SAYE). The discount is treated as employment income and taxed according to your marginal rate (income tax and National Insurance). This is usually deducted at source through PAYE on the purchase date. If the price goes up and you sell, you will be liable to Capital Gains Tax on the gain versus your cost, which is assumed to be market value at the time of purchase (not the discounted price).

Should you sell your ESPP shares as soon as they land, or hold on to them?

Advice will differ for each individual case and this depends on your personal circumstances and cashflow needs. Some exposure to your employer's stock does help to align interests and make you feel like an owner rather than just an employee. Longer term, though, you will need to see if this investment fits in with your financial planning needs and whether more diversification might help you achieve your goals.

How much of your money is too much to have tied up in your employer’s shares?

There is no set percentage and this differs from one person to another. As a broad rule, we recommend though not to have more than 10% of your liquid net worth in any one stock or more speculative investments.

What happens to your ESPP shares if you leave the company or are made redundant? 

Shares purchased in the past still belong to you, but the plan will stop and any deductions for a future purchase would most likely be cancelled or refunded.