A Company Share Option Plan (CSOP) allows a company to grant options over shares to employees and directors over shares. The maximum amount of options an individual can receive is £30,000 (as at the date of the grant).
As long as the exercise of the options takes place 3 or more years after grant, then the acquisition of the shares will be free of income tax and National Insurance contributions (NICs).
When will a CSOP be appropriate?
A Company Share Option Plan (CSOP) allows a company to select particular employees and directors to benefit.
As such, this might be more suitable in meeting the Company’s objectives when compared with Share Incentive Plans (SIP) or Save As You Earn as all eligible employees and directors must be invited to participate.
As stated above, an individual can hold CSOP options over shares with a value of up to £30,000. This value is tested at the date of the grant. Any excess options will be unapproved and therefore unable to benefit from tax-favoured treatment.
CSOP v Enterprise Management Incentive (“EMI”)
The EMI scheme is a very attractive arrangement for many businesses looking to reward key members of staff.
However, there may be reasons preventing a Company from granting options under the more generous EMI regime. Commonly, this is for the following reasons:
- The Company is too large; or
- The Company does not carry on a “qualifying trade”
As such, CSOP may be an alternative.
Which companies can use a CSOP?
To qualify to grant a tax-favoured option under a CSOP a company must be:
- a listed company; or
- independent and not controlled by another company (other than the corporate trustee of an employee ownership trust).
The shares issued under that option must also fulfil certain conditions, including that they must:
- form part of the ordinary share capital of the company;
- be fully paid up and not redeemable.
Who can participate?
The Company has almost complete discretion.
However, only executive directors working at least 25 hours a week for the company are eligible. Of course, this means NEDs cannot qualify and neither can directors who do not satisfy the 25-hour test. There is no working time requirement for employees who are not directors. So, a part-time employee can still qualify.
Further, any individuals with a material interest, which equates to a 30% interest, are generally unable to participate.
Conditions of the options
A condition of the CSOP Scheme is that share options must be granted with an exercise price which is equal to (or exceeds) the market value at grant.
As such, participants participate in the growth in value of the shares between grant and exercise of the share option.
That growth is free of income tax free where one continues to satisfy the relevant conditions.
When can an option be exercised?
The the option should not be exercised within a period of three years following the grant of the option.
It is possible to make exercise contingent on the achieving of certain performance targets. These will, of course, need to be set out in detail and articulated to the participant.
It is possible that the exercise of the option within that 3 year period can still benefit from the tax advantaged status where:
- the employee is a “good leaver” – In other words, they have left the Company as a result of disability, injury, retirement or redundancy;
- Specific company transactions take place – this would include a cash takeover and certain reorganisations
Any growth in value between the grant and the exercise is free of income tax and NICs.
On a sale of the shares by an employee then the normal capital gains tax (CGT) rules will apply. If there has been an increase in the market value of the shares between exercise and sale then there will be taxable disposal.
If the options are exercised within the 3-year period, other than in the specified circumstances set out above, then income tax will be due on any growth.
This may be collected under PAYE if the shares are “readily convertible assets” at the time. If this is the case then NICs will also be due.
The company should be able to obtain a corporation tax deduction on exercise. Tax relief is given as a deduction from company profits of an amount equivalent to the benefit received by the participant.
If you would like to explore using, or have any questions about, a Company Share Option Plan (“CSOP”) then please get in touch.