Company Share Ownership Plans

A Company Share Option Plan (CSOP) enables a company to grant share options to selected executive directors and employees over shares at a market value agreed with HMRC at grant date. The acquisition of shares on the exercise of the option three 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 £60,000 (from 6 April 2023), however it's important to note that this amount is calculated using the HMRC-agreed market value, which for employees will typically be heavily discounted, such that the £60,000 limit is actually worth four or five times that amount in real market value.

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. 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% shareholding – in a close company whose shares may be acquired under the CSOP 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. 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 (£60,000 from April 2023) 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 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 option holder.

Note on the changes in the October 2024 Budget

• The rates of Capital Gains Tax (CGT) have increased as follows:
• The normal rate on the sale of shares has increased from 20% to 24%
• Although the CGT rates have increased, employees are still far better off using CSOP options – without CSOP they could pay around 60% PAYE/NI.
  

Our fees

We offer a fixed fee service for £3495 + vat to set up a CSOP, which includes

• Advice on design and structure

• Share Valuation preparation and agreement with HMRC

• Board minutes and Shareholder resolutions

• Review of your Articles to assess conformance with the EMI scheme

• Option certificates and Scheme Rules

• Formal online notification of the grant of the options to HMRC

• Help guides for you and for employees

TO GET IN TOUCH - call us on 01392 432654, use the Contact Form or email us.

Summary

A CSOP is an efficient way to deliver an additional financial benefit to selected individuals within an organisation.

Download our Guide here.