Budget tax hike to hit share options

Following this week's budget announcement by Gordon Brown, there are warnings that some investment bankers could face new tax charges.

Mercer Human Resource Consulting warns that employees awarded phantom share options and stock appreciation rights (SARs) may now be taxed on the date they are granted.

Mercer says the tax changes follow an alteration in way securities are defined in tax legislation to include phantom options, which are currently excluded. It says this could mean phantom options and SARs will now be taxed when they are awarded. At the moment they are taxed only when exercised in return for a cash payment.

Michael Landon, a principal at Mercer, says, "If awards of this kind are redefined as securities, in many cases they will be taxable at the grant date. Employees will then suffer an income tax and National Insurance contribution charge several years before they receive the cash benefit from their awards."

Landon says phantom options are typically awarded to bankers working in subsidiaries of larger companies. As a subsidiary of Dresdner Bank, which is itself a subsidiary of AXA, Dresdner Kleinwort Wasserstein is understood to have issued its staff with phantom share options in the past, for example.

Landon says there is a danger that bankers awarded phantom share options in recent years may now be taxed retrospectively to December 2004.