When it comes to tech wealth, restricted stock units (RSUs), and employee stock schemes, Elon Musk’s situation highlights the value of managing your investments, minimising your tax liabilities, and maximising returns. The serial entrepreneur has wealth into the hundreds of billions of dollars, recently confirming his 2021 tax bill was $12 billion, but he is regularly described as “cash poor” and asset rich.
Many US tech companies offer attractive employee benefits, but for many, managing RSUs can be particularly challenging. The staggered timing of disposals can impact your retirement plans, company benefits and compensation, tax liabilities and even restrict plans to transfer your wealth. Understanding how RSUs work and what you can do to maximise returns is crucial.
RSUs and financial planning
Before diving into the financial planning consequences of RSUs, it is helpful to understand why they may be granted:-
- Attracting and retaining talent
- Aligning employee and shareholder interests
- Conserving company cash flow
- Flexibility in structure
- Tax efficiency
- Relatively simple administration
- Providing long-term incentives
- Encouraging employee loyalty
The key to RSUs is that there is no immediate ownership (or tax liability); the employee only owns the shares once they are vested.
Understanding RSUs
The specific terms of individual technology company RSUs can vary, but they all retain similar characteristics in areas such as:-
Ownership
As we alluded to above, the award of RSUs is very different from ownership, with ownership only applying once they have been vested. Traditionally, your employer would look to stagger the vesting of your stock (pay for your shares) over several quarters or even years.
Income tax
Upon the vesting of your RSUs, the amount invested by your employer will be added to your salary and taxed accordingly. Not only will you be liable for employee national insurance (2% over £967 a week) and income tax (45% for top-rate taxpayers), you may be expected to cover additional national insurance (13.80%) liabilities for your employer. Before recent adjustments in national insurance contributions, this is where the so-called 60% trap occurred.
Capital gains
If you decide to sell your RSUs when they are vested, there are no additional capital gains. Where you choose to hold onto your stock, after vesting by the company, you will generally be liable to capital gains tax on any profit. It’s essential to take advice on this taxation element because the individual capital gains tax allowance has recently been reduced from £12,300 down to £6000 and now stands at £3000 for the 2024/25 tax year.
Purchase price
Unlike options or an employee share scheme, there is no exercise price for RSUs. Your employer initially covers the cost based on the market value, ensuring you receive your stock regardless of the price. When your RSUs are vested by the company, that is your date of purchase, and the cost is your base cost for capital gains tax purposes. Whether the shares double or half between the granting and vesting of RSUs won’t impact the amount of stock received, as this is fixed.
Unvested RSUs
If you leave employment before your RSUs are vested, you usually forfeit the right to the stock. The same applies if you fail to meet performance targets linked to the award of your RSUs.
Flexible terms
While the treatment of RSUs concerning income, taxation, and capital gains is set in stone, your employer does have a degree of flexibility with their scheme. For example, vesting schedules could be varied, performance conditions could be adapted, and other criteria could be amended or removed.
Which technology companies offer RSUs?
While RSUs are a more tax-efficient way to incentivise employees, many technology companies also offer employee stock purchase plans (ESPPs).
| Company | RSUs | ESPPs |
| Yes | No | |
| Amazon | Yes | No |
| Apple | Yes | Yes |
| Cisco | Yes | Yes |
| IBM | Yes | Yes |
For many people, this prompts the question: why don’t Google and Amazon offer ESPPs? The answer is that they prefer to focus on RSUs to reward their employees, although this approach could change at any time.
Frequently asked questions regarding RSUs
Having covered the structure of a typical RSU scheme, there are still many frequently asked questions from recipients.
Am I restricted in how, when and where I can divest my RSU interest?
When the RSUs are granted, they are not physical stock and therefore, you don’t ‘hold’ them. You take ownership only when the RSUs are vested by the company and bought at the open market price.
Typically, you would be free to sell your RSU interest anytime. However, if the company is publicly quoted, sensitive periods ahead of company results or corporate activity may delay a potential sale.
How do I balance my belief in the company – that the shares will grow – with my need for the cash held in them?
Whether you work for Google, Amazon or one of the other large technology companies, it’s vital to differentiate loyalty from financial diversification and risk. This is where your adviser can provide impartial advice without an emotional connection to the company or the shares. Once your shares have been vested and are in your possession, how you manage these as part of your broader investments is your choice.
How do I work out the capital gain on my RSUs?
To calculate any capital gain, there must be a base cost (acquisition cost) and a sale price. For tax purposes, the acquisition price of your RSUs is the market value at the time they were vested. In practical terms, this is how it works:-
Date of vesting
For tax purposes, the date your RSUs were granted is irrelevant; what matters is the value of the RSUs on the day they were vested. This creates the base cost from which any gain/loss will be calculated.
Example
You were granted 100 RSUs on January 1, 2023, and they were vested on January 1, 2024, when the stock price was £50. This values your RSUs at a total of £5,000, which is treated as ordinary income and taxed accordingly, but it is also your base cost.
If you were to sell 100 shares on July 1st, 2024, when the market value is £60 per share, the total selling price would be £6,000.
Capital Gain Calculation:
Acquisition Price (Base Cost): £5,000
Selling Price: £6,000
Capital Gain: £6,000 – £5,000 = £1,000
In this instance, the capital gain of £1,000 would be potentially subject to capital gains tax. However, there may be ways to mitigate this, such as using your annual capital gains tax allowance or offsetting against investment losses elsewhere.
By understanding this process, it becomes clear how RSUs can create a capital gain even without an initial purchase price on granting. The key is the market value on the vesting date, which serves as the cost basis for future capital gain or loss calculations.
Not all RSU sales will result in a capital gain; some may result in a loss, or you may get your money back and nothing else. Your financial adviser will guide you on the most appropriate action for your situation.
Is there a minimum holding period for my RSUs?
When you are granted RSUs, there will be a timetable for vesting them, which might be staggered, for example, over years four, five, six, and seven after they were granted. This is the only restriction you will experience. Once the RSUs have been vested, they will be transferred into your name and owned by you, with no minimum holding period or restrictions on future sales.
What happens to my RSUs if I leave the company?
If you leave the company before your RSUs are vested, the arrangement is usually cancelled without financial compensation. However, depending on your reason for leaving the company, perhaps compulsory redundancies, you may be able to negotiate the vesting of any outstanding RSUs, but this will depend upon the circumstances.
I’ve been offered stock incentives; what are the pros and cons of RSUs vs stock options?
When RSUs are granted, there is no exercise price; you simply receive a fixed number of shares at a predetermined time of vesting. Stock options differ; the price is set at the date granted, with exercise dates likely predetermined, but you don’t take control of the stock until you exercise the option.
Depending on the type of stock option, you may be liable to income tax or capital gains on any profit. If the stock price is below the granted price, the options are effectively worthless and would not be exercised.
Are there potential tax benefits to deferring my RSUs into later life?
Before we answer this question, there are two main caveats:
- It’s important to realise that the income and capital gains tax rates may change going forward; therefore, the only certainty is in the current tax year. That said, there may be ways to reduce your tax liability by deferring them until later in life when your income tax rate may be lower.
- This is entirely dependent on your personal financial and fiscal situation, and you must take advice.
Even in employment, there may be opportunities to reduce your tax liability by, for example, undertaking a salary sacrifice. This would see your employer increase their contributions to your pension in exchange for a reduced salary, which would take into account the value of your RSUs and manage your tax rate. You need to take advice on this one!
On a more basic level, you can claim tax relief on personal pension contributions while considering the earnings criteria cap. Your pension plan provider will automatically apply for basic rate relief of 20%, with higher and additional rate taxpayers able to claim further relief via their tax returns. This is a useful means of clawing back an element of the income tax paid upon the vesting of your RSUs.
How do RSUs fit into estate planning?
Once your RSUs have been vested, they will be treated like any other investment, and the resultant value must be considered in your estate planning. Subject to specific scheme terms and conditions, if you were to die with unvested RSUs, they would typically be vested immediately and paid out in either stock or cash to your estate. The value of the stock/cash would be treated as part of your estate. Even though they weren’t vested before your death and were not in your ownership, your death triggered the vesting by your employer.
There are numerous ways to reduce your tax liability through charitable donations, philanthropy, gifting, and trusts. Long-term tax planning is most beneficial in this case, as it considers the future and takes advantage of tax breaks and relief today.
Should I review RSUs as part of my long-term financial planning?
While your employer may have scope to tweak the terms and conditions of RSU awards, the basic structure concerning ownership and taxation is standard. If you receive RSUs, whether or not they have been vested, you must inform your financial adviser as soon as possible. There may be ways to reduce your tax liability and maximise returns while integrating long-term financial and estate planning elements.
It’s important to appreciate not only the gross value but also the net value after deductions and potential capital gains liabilities going forward.
Am I running high risks by having most of my wealth in the shares of one company?
Generally, yes, but the degree of risk depends on many factors. While you don’t want to forego the significant capital growth that can accompany holding shares in a high-growth business you’re familiar with, it’s crucial to manage risk appropriately. Bear in mind also that you are doubly exposed to the risk of your firm underperforming, given that you also receive a salary and bonus from them. A financial planner can help formulate a graduated divestment plan that balances capturing growth with mitigating high risks as you approach retirement.
Summary
The technology sector has been particularly buoyant in recent years and many employees have benefited from the granting of RSUs. Those involved in the early days of today’s tech giants are not only sitting on significant nest eggs but also potentially significant tax liabilities. Many employers often introduce flexible vesting periods to help employees manage their taxes, but you still need to be aware of potential liabilities going forward.
At Thera Wealth Management, we can help you integrate RSUs into your long-term financial planning and estate management. Retaining a significant number of RSUs going forward could see what you once thought was a relatively large nest egg reduced to a much smaller amount, potentially decimating your retirement plans. As with many investments, what you don’t do today can be as important as what you do, in determining your wealth in the future.
This blog is for information purposes and does not constitute financial advice, which should be based on your individual circumstances.
The taxation of the investment is dependent on the individual circumstance of each investor, and may be subject to change in the future.
Any rates of investment growth shown, are intended as a guide only, they are not guaranteed, nor are they intended to be either minimums or maximums.
A pension is a long-term investment and the value is not guaranteed. Any advice or considerations are personal to each individual’s circumstances.
A pension is a long-term investment, the value of your investment and the income from it may go down as well as up. Your eventual income may depend upon the size of the fund at retirement, future interest rates and tax legislation. [where ‘investment’ is mentioned]
