UNITED KINGDOM - Nil cost options may be preferable to RSUs
US companies with senior executives in the UK should consider granting incentives in the form of nil-cost options (NCOs) rather than RSUs.
This is because an NCO gives the executive the opportunity to control the timing of the resulting income tax liability. With an RSU, the UK tax point will be vesting, which arises automatically when the necessary conditions are fulfilled. But with an NCO, the UK tax point arises when the executive chooses to exercise it.
The top UK income tax rates are rising to their highest point in a generation - 51% from April 2010 and 52% from April 2011. Many people believe, or hope, that these rates will have to fall again within the next few years to preserve the UK's competitiveness.
The risk with an RSU is that the tax charge arises automatically at a time when the executive is paying tax at 52%, whereas with an NCO, the executive could defer the tax liability into a future, possibly more benign, tax regime.
It is usually possible to convert RSUs into NCOs without the conversion itself triggering any UK tax liability.
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Aidan,
Do you know if the conversion results in a modification for accounting purposes?
Dan
Dan, I don't know the position under US GAAP. Under IFRS it would be a modification, but since it would not increase the value of the award, there should be no incremental accounting charge. Obviously this would need to be confirmed by the auditors.