Making informed decisions on restricted stock units, stock options and employee stock purchase plans.
In today's competitive landscape, attracting and retaining top talent is crucial for success. One effective strategy that companies use, particularly in the financial and technology sectors, is offering equity compensation schemes, such as Restricted Stock Units (RSUs), Stock Options, and Employee Stock Purchase Plans (ESPPs). These schemes not only align employee and company goals but also provide potential financial gains, fostering growth and motivation.
Understanding the mechanics and risks of these vehicles can be challenging, particularly for globally mobile Americans facing cross-border tax implications. As a wealth manager, our goal is to provide clients with expert guidance and professional insights to help navigate the challenges and opportunities of equity compensation. Whether you're looking to optimise your financial strategy or seeking advice on managing your equity awards, we are here to support you every step of the way. Below, we define the key components of these compensation schemes to help you better understand their benefits and implications.
RSUs are a form of compensation issued by an employer in the form of company shares. RSUs are "restricted" because they are subject to a vesting schedule, which typically requires the employee to fulfil certain conditions, such as remaining with the company for a specified period, before they can be owned outright.
RSUs are typically taxed as income when they vest, and employers tend to withhold shares to cover the tax liability. Furthermore, an employee will then own the shares and any subsequent gain or loss from a sale is subject to capital gains tax rules which can vary between the US and UK.
Stock Options give employees the right to purchase company stock at a set price (“exercise price”), usually lower than the market value, after a specified period of time. There is potential for significant financial gain if the company stock appreciates, but employees must have sufficient cash on hand to exercise the options. Additionally, if the stock price falls below the exercise price or if the option expires, they can become worthless.
US stock options are characterised as either Incentive Stock Options (ISOs) or Non-Qualified Stock Options (NSOs). ISOs can offer more favourable tax treatment if certain conditions are met, but consulting with a tax advisor is crucial to understand your US and UK tax liability.
An ESPP allows employees to buy company stock at a discount, typically up to 15%, through payroll deductions over a set offering period. ESPPs can be either qualified or non-qualified, affecting how the discount and subsequent gains are taxed.
To manage these employee equity plans effectively, consider the timing and vesting of your equity awards to coincide with lower income years to reduce your overall tax burden. Additionally, there can be opportunities for new UK residents to take advantage of the UK’s favourable Foreign Income and Gains (FIG) regime to limit UK tax exposure. We recommend consulting with a tax advisor to provide personalised tax advice based on your individual circumstances.
Holding a large proportion of your financial assets in employer stock can pose significant risks. While it may seem advantageous to hold onto shares for potential growth, this strategy can expose you to increased volatility and company-specific risks. At LGT Wealth Management US, we develop robust diversification strategies to balance your portfolio and reduce risk, taking any employer stock into account. Our approach includes:
Working with a cross-border wealth management specialist who understands both UK and US tax and compensation structures ensures that your equity compensation is managed and diversified efficiently. At LGT Wealth Management US, we can help optimise your benefits, provide education on your equity awards and manage risks to meet your financial planning and investment goals. If you receive equity awards and need guidance, we are here to help. Contact us today to schedule a consultation and take the first step towards optimising your wealth management strategy.
LGT Wealth Management US Limited is a registered Company in England & Wales, registered number 06455240. Registered Office: 14 Cornhill, London EC3V 3NR. LGT Wealth Management US Limited is Authorised and Regulated by the UK Financial Conduct Authority and is a Registered Investment Adviser with the US Securities and Exchange Commission.
This communication is provided for information purposes only. The information presented is not intended and should not be construed as an offer, solicitation, recommendation or advice to buy and/or sell any specific investments or participate in any investment (or other) strategy and should not be construed as such. The views expressed in this publication do not necessarily reflect the views of LGT Wealth Management US Limited as a whole or any part thereof. Although the information is based on data which LGT Wealth Management US Limited considers reliable, no representation or warranty (express or otherwise) is given as to the accuracy or completeness of the information contained in this Publication, and LGT Wealth Management US Limited and its employees accept no liability for the consequences of acting upon the information contained herein. Information about potential tax benefits is based on our understanding of current tax law and practice and may be subject to change. The tax treatment depends on the individual circumstances of each individual and may be subject to change in the future.
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