Other Share Schemes

For employees, the EMI option scheme is by far the most beneficial but if the company or the employee is not eligible for some reason then there are other forms of option schemes and incentives that may be suitable, as listed below. For example, the EMI is not available for non-exec directors or consultants, as they are not employees, but they can be granted 'unapproved options'. We have a useful guide to share and option schemes which can help you choose a suitable plan - click here to download.

Our specialists can help with the following schemes and structures – please call or email –

  • Company share option plans (“CSOP”) – design and drafting of CSOPs. Tax efficient HMRC tax favoured options but with relatively limited flexibility and valuation cap. Useful where options are preferred to shares and where EMI is not available (more information is shown below).
  • Share acquisition plans – design and drafting of shares which may be subject to commercial performance targets (to aid in motivation) and leaver provisions (to assist with retention). Applicable generally where the market value of the shares is low.
  • Deferred share plans/nil or partly paid plans – design and drafting of up-front share acquisitions but where the acquisition cost to employees is deferred. Deferred/nil or part paid share plans offer tax savings to employees and employers but with additional legal and tax issues to consider. Useful where EMI isn’t available and particularly relevant where reducing employee tax costs is key to the incentive.
  • Growth share plans – design and drafting of a particular class of employee shares which have an inherent lack of economic entitlements but with the potential for employees to share in the eventual growth in value of shares. Growth shares provide tax and funding cost benefits to employees and tax savings to the employer and can be combined with EMI for extra efficiencies and commercial flexibility and with Employee Shareholder Shares (see below). Growth shares may offer significant savings where the current market value of shares is already substantial, through their ability to reduce the up-front unrestricted market value of the shares. In particular, we have seen the use of growth shares in trading subsidiaries of listed companies to tax efficiently allow executives to share in growth and to help build more meaningful PLC level shareholdings.
  • Joint share plans (“JSP”) – design and drafting of JSPs. Shares are jointly held by employees and an employee trust on the basis that the employees are entitled to a share in the future growth in value of the company (possibly in excess of a target hurdle). Joint shares provide tax and funding cost benefits to employees, together with employer tax savings. Often used for listed companies or where establishing a separate class of growth shares is not feasible.
  • Unapproved options – design and drafting of flexible options which can be used for non-employees, as a top-up to other arrangements or as a stand-alone incentive. They are called 'unapproved' because they do not have any specific legislated tax breaks, unlike the EMI and CSOP for example.
  • Phantom option plans – design and drafting of cash based incentives with the value of the pay-outs calculated by reference to increased share values. Phantom options are flexible and help to avoid share dilution but are relatively tax inefficient.
  • Cash bonuses – design and drafting of bonus plans with a particular focus on the commercials and legal protections for employers.
  • Share Incentive Plans – design and drafting of HMRC tax favoured all-employee Share Incentive Plans.
  • Listed company share plans – involving applicable plans mentioned above plus SAYE, Deferred Annual Bonus Plans, Co-Investment Plans and Long-Term-Incentive Plans/Performance Share Plans.
  • Employee Shareholder Shares – share right design and drafting and associated employment law advice for the Government’s new employee shareholder scheme. Such shares offer unlimited CGT free gains in exchange for the sacrifice of certain employment rights. Closed to new schemes from 1 December 2016.
  • Internal share markets – where an exit is unlikely, for example in family owned companies, we can advise on the design, creation and drafting of internal markets for enabling employees to realise value from their holdings.
  • Employee Benefit Trusts – design and drafting of EBTs and associated legal and tax advice including disguised remuneration in the context of incentive plans.

Company Share Option Plans (CSOP)

A Company Share Option Plan (CSOP) enables a company to grant share options to selected executive directors and employees over shares with a maximum value per individual of £30,000 at the date of the grant. The acquisition of shares on the exercise of the option 3 or more years after the date of the grant will be free of income tax and National Insurance contributions (NICs).

When will a CSOP be appropriate?

A CSOP is a discretionary plan, which means that companies can select particular executive directors or employees to benefit, rather than an all-employee plan such as the approved share incentive plan (SIP) or Save As You Earn, where all eligible employees and directors must be invited to participate.

An individual can hold CSOP options over shares with a value of up to £30,000, based on the market value at the date of the grant, at any time. Any options granted above this limit will be unapproved (i.e. unable to benefit from tax-favoured treatment).

Which companies can use a CSOP?

To qualify to grant a tax-favoured option under a CSOP, a company must either be a listed company or, if unlisted, must be 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 be granted an option?

Any employee is eligible, but only executive directors working at least 25 hours a week for the company are eligible – non-executive directors cannot participate. There is no working time requirement for employees who are not directors.

Individuals with a material interest – broadly a 30% interest – in a close company whose shares may be acquired under the CSOP, or which controls that company, or which is a member of a consortium which owns such a controlling company, are also unable to participate. A close company, for the purposes of UK tax law, is broadly speaking a small company with no more than five controlling parties.

Requirements for the options themselves

Share options must be granted with an exercise price which is equal to or exceeds the market value of a share at the grant date. Discounted options cannot be granted under a CSOP. The options, therefore, provide a benefit to participants to the extent that the value of the shares increases between the date of the grant and the date the participant exercises that share option. That growth in value is delivered income tax free under a CSOP within the £30,000 maximum limit and assuming all other conditions are met.

When can an option be exercised?

In order to benefit from the favourable tax treatment offered by a CSOP, the option should not be exercised less than three years from the date of the grant except in certain circumstances set out below. Additionally, employees may only become eligible to exercise options subject to specified performance targets, which should be clearly laid out by the company at the date of the grant and communicated to optionholders. The share options would then become exercisable, if at all, to the extent that these performance targets were met.

Early exercise of a share option (ie within 3 years from the date of the grant) may benefit from the tax-favoured status in the following circumstances:

  • "good leavers" – disability, injury, retirement or redundancy (if exercised within 6 months);
  • death (if exercised within 12 months);
  • certain "company events" - a cash takeover of the company, a court-sanctioned scheme of arrangement, or a shareholder approved reorganisation of a non-UK company's share capital or a minority squeeze out, provided certain conditions are met (if exercised within 6 months).

Tax treatment

For individuals exercising CSOP options in approved circumstances, the big advantage of the scheme is that any increase in the value of the shares between the grant and the exercise of the share option is delivered free of income tax and NICs. If and when the shares are sold by the employee, normal capital gains tax (CGT) rules will apply if there has been an increase in the market value of the shares between the time the share option was exercised and when the shares were disposed of, so tax will be payable at the 10% or 20% rate for CGT and the annual allowance will be available as well.

Where share options are exercised within 3 years of the date of grant other than in the specified circumstances above, income tax will be due on any increase in value between the market value of the shares at the date they are acquired and the exercise price. This may be collected under Pay As You Earn (PAYE) arrangements if the shares are "readily convertible assets" at the time, in which case NICs (including employer NICs) will also be due.

The company itself is likely to qualify for a corporation tax deduction when the option is exercised by its employees. Tax relief is given as a deduction from company profits of an amount equivalent to the benefit received by the optionholder.

Summary

A CSOP is an efficient way to deliver an additional financial benefit to selected individuals within an organisation. As awards under a CSOP is limited to £30,000, a company may want to consider granting additional unapproved awards according to its needs.