ERSM20194 - Employment-related securities and options: what are securities: RSUs and dividend equivalents: examples
The following examples are necessarily general. How the law applies in actual cases will depend on the specific facts of each.
Example 1 - RSU without dividend equivalents
The long-term incentive plan of Can-it-Rite Inc awards 1,000 RSUs to William, vesting in three years’ time. The plan entitles William to receive 1000 shares at vesting. When the award vests, he receives shares worth £4,500.
Until 5 April 2016, the money’s worth of the shares may have been earnings. From April 2016, William is charged to tax under Chapter 5 of Part 7 on the market value of the shares received at vesting of £4,500.
(See ERSM110015 and ERSM110025 if the plan provides an ability to instead satisfy the award in cash).
Example 2 - RSU with rolled up dividend equivalents paid out in shares
The long-term incentive plan of Can-it-Rite Inc awards 1,000 RSUs to Wilma, vesting in three years’ time. At vesting Wilma receives 1,000 shares worth £4,500 plus a further 100 shares worth £450 equivalent in value to dividends voted during the three-year period.
If the company has the discretion to pay out both the award and the dividend equivalents in cash, then Wilma does not have a right to acquire securities (See ERSM110025) and so the award and dividend equivalent rights are not securities options. She is taxed on the money’s worth received at vesting of £4,950.
If alternatively, Wilma can choose whether to receive shares or cash, then she does have a right to acquire securities and, from 6 April 2016 any cash or securities she receives is chargeable as employment income by virtue of Chapter 5 of Part 7.
Example 3 - RSU with rolled up dividend equivalents paid out in cash
The long-term incentive plan of Can-it-Rite Inc awards 1,000 RSUs to Willie, vesting in three years’ time. The employer may pay out in cash or shares. At vesting Willie receives 1,000 shares worth £4,500 plus a further £450 equivalent in value to dividends voted during the three-year period.
Willie is charged to tax on the total of money’s worth received of £4,500 and cash earnings of £450, at vesting, making a total charge on £4,950
Example 4 - RSU with dividend equivalents paid out in cash
The long-term incentive plan of Can-it-Rite Inc awards 1,000 RSUs to Bill, vesting in three years’ time. The employer may pay out in cash or shares. Each year Bill receives a dividend equivalent in cash from his employer of £150. If Bill leaves the company he will lose any remaining benefit in the RSU. At vesting Bill receives 1,000 shares worth £4,500.
Bill is charged to tax each year on the cash payment of £150 as earnings and when he receives the shares at vesting he is charged on the money’s worth received of £4,500.