RSU Double Taxation After Moving Abroad

Introduction

Restricted Stock Units (RSUs) are a common form of employee compensation, but they can present significant tax challenges, especially for employees who move to another country. If you hold RSUs and relocate during or after the vesting period, you may face RSU double taxation, as both the granting and new resident countries might claim tax on your shares. This article explores the issues you might encounter and practical strategies to address them.

Understanding RSU Taxation

RSU Tax Basics

1. Grant: RSUs are not taxed at the time of grant.
2. Vesting: At vesting, the market value of the shares is considered taxable income, often subject to withholding by your employer.
3. Sale: Upon selling vested shares, any difference between the sale price and the vesting date’s fair market value is subject to capital gains tax.

Tax Implications After Moving

When you relocate, more than one country may claim tax on the same RSUs. The country you leave may tax the part of a vest linked to the time you worked there, even if the shares vest after you have moved, while your new country may tax the vest because you are resident there when it happens. Depending on the timing of your move and the vesting schedule, you could owe tax in both countries.

Common Issues Faced by RSU Holders

1. Double Taxation

RSU double taxation can occur when both countries tax the same RSU income. For example:

• Country A taxes RSUs as income at vesting.
• Country B taxes RSUs upon sale, including the vesting income already taxed in Country A.
• Country A and B might charge tax on RSU as income which were granted before you moved and vested in your new home country.

2. Complex Cost Basis Reporting

Brokerages sometimes fail to report the correct cost basis, leading to higher tax liabilities or not aligned to the tax rules of your country. For example, a common problem faced by people who receive US stocks while living in the UK, is that the brokerage accounts do not use UK rules for cost basis. The cost basis should reflect the fair market value at vesting, but it may be reported as zero or an incorrect value, triggering unnecessary capital gains tax or confusion as to how to calculate capital gains.

3. Tax Treaty Challenges

While tax treaties aim to mitigate double taxation, navigating them can be complex. Treaty benefits are often subject to detailed residency tests and require proactive compliance.

How to Reduce RSU Double Taxation

1. Understand Tax Residency

Determine your tax residency in both countries, as this influences the taxation of RSUs. Residency laws differ between jurisdictions, so consult local tax rules or a professional.

2. Leverage Tax Treaties

Check if a tax treaty exists between the countries involved. These treaties often allow for tax credits or exemptions to reduce double taxation.

3. Adjust Cost Basis

Ensure your cost basis is correctly reported on your tax return:

• Review your employer’s vesting records.
• Adjust the cost basis on forms like the UK’s self-assessment or US Form 8949.
• If you live in the UK and have given your broker a Form W-8BEN, it will usually issue Form 1042-S each year. This shows the US dividends paid to you and the US tax withheld and paid to the IRS, normally 15% under the UK/US tax treaty, which you can claim as a credit on your UK tax return. Form 1042-S does not cover capital gains: your broker will not calculate or report your UK Capital Gains Tax, so you need to work this out under UK rules and report it on your Self Assessment return.

4. Plan RSU Sales Strategically

If possible, time the sale of your shares to align with tax rules in your resident country, potentially reducing capital gains tax.

5. Seek Professional Advice

Work with tax advisors to ensure compliance and optimise your tax position. They can help with treaty applications, tax return adjustments, and long-term financial planning.

UK Specific Rules for RSU Holders

If the UK is one of the countries involved, these UK rules usually decide whether you face RSU double taxation and how much tax you pay.

1. UK Tax Residency and Split Year Treatment

• Your UK residence status is decided each tax year (6 April to 5 April) under the Statutory Residence Test.
• In the year you arrive in or leave the UK, split year treatment may divide the tax year into a UK part and an overseas part, if you meet one of the qualifying cases.
• Residence status affects how your RSU income is taxed and whether UK Capital Gains Tax applies when you sell.

2. How the UK Taxes RSUs That Vest Around a Move

• The market value of the shares at vesting is taxed as employment income. Your employer normally deducts Income Tax and National Insurance through PAYE, as the shares are readily convertible assets.
• If you were internationally mobile between grant and vesting, the UK apportions the vest by workdays over that period.
• The UK taxes the part linked to your UK residence and UK workdays, even if you have already left the UK when the RSUs vest. PAYE may still be operated on that part.

3. Overseas Workday Relief for New Arrivals

• From 6 April 2025, if you qualify for the four year foreign income and gains regime (broadly, you were not UK resident in any of the previous 10 tax years), you can claim Overseas Workday Relief for your first four tax years of UK residence.
• The relief covers earnings for work done outside the UK, including the part of an RSU vest linked to non UK workdays.
• It is capped at the lower of £300,000 or 30% of your qualifying employment income each tax year, and must be claimed on your Self Assessment return. See HMRC guidance on Overseas Workday Relief.

4. Claiming Relief for RSU Double Taxation in the UK

• Where another country taxes the same RSU income or gain as the UK, you can usually claim Foreign Tax Credit Relief on your Self Assessment return.
• The credit is limited to the UK tax due on the same income, and the relevant tax treaty decides which country has the first right to tax.

5. UK Capital Gains Tax When You Sell

• Your UK cost is the market value of the shares at vesting (the amount taxed as income), converted to sterling at the exchange rate on the vesting date.
• Sale proceeds are converted at the rate on the sale date, so currency movements alone can create a gain or loss.
• The UK matches shares sold with shares acquired on the same day, then within the next 30 days, then from a Section 104 pool at average cost. US brokers use different lot methods, so their figures rarely match UK rules.
• Shares sold to cover tax on the vesting date usually produce little or no gain.
• Gains above the £3,000 annual exempt amount are taxed at 18% or 24%, depending on your income, and are reported on your Self Assessment return.

6. Leaving the UK and Temporary Non Residence

• Non residents are generally not liable to UK Capital Gains Tax on listed shares.
• However, if you were UK resident in at least four of the seven tax years before leaving and return within five years, gains on shares you held when you left and sold while abroad are taxed in the year you return.
• Your new country of residence may also tax the gain, so check both sets of rules before selling.

7. US Citizens Living in the UK

• US citizens and green card holders must file a US tax return (Form 1040) every year, wherever they live, and report their RSU income and share sales on it.
• The UK usually has the first right to tax RSU income earned from UK workdays, and the US return then claims a foreign tax credit for the UK tax paid.
• UK and US rules on cost basis, exchange rates and timing differ, so the figures on each return will not always match.

FAQs

Q: Can RSUs be taxed in two countries simultaneously?
Yes, if you relocate, both the granting and resident countries may tax RSU income. Mitigating this often requires applying for tax treaty benefits or claiming foreign tax credits.

Q: How can I avoid double taxation on RSUs?
Double taxation is usually relieved rather than avoided. The tax treaty between the two countries decides which country has the first right to tax, and the other country then gives a credit for the tax paid. Make sure the vesting income is apportioned correctly between the countries, and use the market value at vesting as your cost when you sell, so the same income is not taxed again as a capital gain.

Q: What if my RSUs vest after I move?
The taxation depends on your RSU plan and the tax laws of both countries. Some countries tax RSUs based on the time spent in each jurisdiction during the vesting period.

Final Thoughts

Managing RSU taxes after relocation can be complex but not insurmountable. By understanding the rules, utilising tax treaties, and seeking expert advice, you can mitigate RSU double taxation and ensure compliance. For tailored guidance, consult with tax professionals who specialise in cross-border taxation.

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