Options vs. Restricted Stock in the UK— which is best?

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A restricted stock unit RSU is compensation offered by an employer to an employee via company stock. The employee does not receive the stock right away. The employee receives it according to a vesting plan and distribution schedule after achieving required performance milestones or incentive stock options vs restricted stock units remaining with the employer for a particular length of time.

Upon vesting, RSUs are considered income, and a portion of the shares are withheld to pay income taxes. The incentive stock options vs restricted stock units receives the remaining shares and can sell them at any time.

With stock options, you can buy company stock on a future date at the price that was current incentive stock options vs restricted stock units you received the stock option. The expectation incentive stock options vs restricted stock units that the stock price will increase above the strike price so that you can earn the difference between the prices.

If the current price of the stock does not go above the strike price then there is no financial gain to the employee. This can create problems for employees because they may not have the cash available to pay the taxes. The holder of an option whether an NSO — non qualified stock option or ISO does not pay any tax as the option vests, and an optionee that never exercises their options will never pay tax. NSOs get taxed on the date of exercise.

ISOs are even better; with an ISO, there is no tax obligation until the underlying security stock is sold. Although there are no taxes due upon exercise of an ISO for regular tax purposes, the gain upon exercise will be counted towards the Alternative Minimum Tax AMT calculation. You should seek the guidance of a qualified tax professional whenever exercising options. The 10, options will turn into 10, shares.

If Joe holds the stocks for more than days, he will also be eligible for the long term capital gains rate. Most employees exercise their options right away a same-day sale. So, in one day, they both exercise their options for shares and sell those shares.

This disqualifies them from receiving long-term capital gains tax treatment. They are instead taxed at the short-term capital gains rate, which is equivalent to their ordinary income tax rate. This means that they will have some value as long as the common stock has value. An RSU with equivalent vesting will be more valuable to employees than an option as you are almost always expected to have some financial gain.

So, the main difference between an RSU and an ISO is that the former may result in a direct cash outlay, whereas, in the latter case you get shares. Of course, if you have an ISO you can choose to turn the stock into cash when you receive the option. If you have an RSU, the company may restrict you to receiving cash only.

The choice between receiving money or stocks incentive stock options vs restricted stock units belong only to your company. Since you are restricted from selling the RSU stock for a certain period, you may wish for the stock option which requires no income tax until you sell. RSU is basically a deferred cash bonus calculated and paid in shares. RSU is taxed to the employee as a cash bonus when they are vested. Any gains after vesting can be taxed as a long-term capital gain if you hold it more than a year.

Of course, you can get the incentive stock options vs restricted stock units result by simply buying the stock on the open market and holding it for more than a year.

Thus, there is no tax advantage of holding RSUs after they vest, since you already paid tax throughout the vesting period.

Disclaimer This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader.

The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.

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Over the past month I have been asked this question more times than I can count and so I thought it was a great topic to write about. Although they are similar in many ways, they have huge differences that can affect ones decision about which to use, if given the choice. Many companies have shyed away from Stock Options and towards Restricted Stock Units RSU because of a change in tax reporting that requires them to expense employee stock options.

Stock Options are the right to buy a specific number of shares in the future at a pre-set price grant price. In general, options vest three years from the date of the grant, and option holders have an additional seven years from the vesting date to exercise them exercise period.

Restricted Stock Units RSU are a grant of units, with each unit, once vested, equal to a share of stock. Company stock is not issued at the time of the grant. Options have value if the stock price rises above the grant price, but could have no value if the stock price is at, or below, the grant price. RSUs will always have value, whether the stock price goes up or down. The value of your award will increase if the price goes up and decrease if it goes down.

In most cases options are taxed as income at the time of exercise, regardless of whether shares are sold or held. Taxes on gains also may need to be paid upon subsequent sale of shares. Speak with a tax accountant to determine what your taxes will be. Here are the questions I usually want to find out about the employee and the company before making a recommendation:. If the employee answers that they have a very low risk tolerance then I would never recommend them choosing options, if given the choice.

This is because with an RSU, they are given the right to actual shares not the right to buy shares at a given price. Look at Merck MRK for example. These options never were worth anything. If the company had given RSUs instead, although they would be worth less than they were when granted, it would have given some return. If the employee answers that they have at least a moderate risk tolerance, the above questions would make a difference to which to choose.

If the answers about the stock are that it: I personally prefer RSUs because of the limited risk in them. Yes, there is more upside potential in an option because of the number of options issued compared to the number of RSUs for the same plan. I hope this helps explain the complicated bonus plans and which may be best for you. Please contact me with any questions or comments,.

Your use of this service is subject to our Terms of Use and Privacy Policy. Information is provided 'as is' and solely for informational purposes, not for investment purposes or advice. Which is better fo Which is better for the employee? Here is table that compares both: Then they are yours to hold or sell Taxation In most cases options are taxed as income at the time of exercise, regardless of whether shares are sold or held. Here are the questions I usually want to find out about the employee and the company before making a recommendation: How high of a risk tolerance do you have?

What tax bracket are you in? How stable has the stock performed over the last 3, 5, and 10 years? Compared to the stock market? How are the fundamentals of the stock right now? How does the sector that the stock is part of look for the future? Recommended Articles, Handpicked for you Financial Planning. Advice by Topic Business Financial Planning Comprehensive Financial Planning Cross Border Financial Planning 1. Divorce Financial Planning 8. Financial Planning for Widows 6. Special Needs Financial Planning 9.

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RSUs become actual shares on vesting. Then they are yours to hold or sell.