Original content provided by BDO United Kingdom
The Company Share Option Plan (CSOP) is a tax-advantaged discretionary share option plan under which a company may grant options to any employee or full time director. The CSOP terms require that the individual must acquire shares at an exercise price that is not be less than the market value of the shares on the date the option was granted.
As there are no limits on company size or number of employees (unlike the Enterprise Management Incentive Plan (EMI), a CSOP can be used by larger companies, listed organisations and those whose trade excludes them from implementing an EMI (such as accountancy or banking businesses).
However, a CSOP is more restrictive than the EMI as:
- Options must be granted at market value
- Each employee can only be granted up to £60,000 of options (£30,000 if granted before 6 April 2023)
- Any gain made by the individual is only exempt from income tax if the options are held at least three years.
What are the tax advantages?
The CSOPs tax reliefs are very generous. Options can be exercised without any income tax or National Insurance Contributions (NIC) liability arising provided certain conditions are met (see below). The UK employing company will generally qualify for a corporation tax deduction equivalent to the amount of gains realised by the employees on the exercise of their options.
The conditions are met if the option is exercised within 10 years of grant and:
- The exercise is at least three years after the grant date, or
- Within six months of cessation of employment for certain “good leaver” reasons
- By the participant’s personal representatives within 12 months of death, or
- Within six months of certain cash takeovers.
Where an option exercise qualifies for income tax and NIC relief, gains made on the subsequent sale of the option shares (compared to the exercise price) are still subject to CGT. However, individuals benefit from a CGT annual exemption (of £12,300 for 2022/23) and thereafter gains are subject to CGT at 20% (or 10% where individuals qualify for Entrepreneur’s Relief).
|Tax Relief summary
||Sale of Shares 2
1 If exercised between the third and tenth anniversaries of grant to obtain maximum income tax benefit or on cessation of employment in certain areas.
2 Capital gains tax on difference between the market value of the shares on sale and the exercise price but annual exemption and /or other reliefs may be available.
What are the qualifying requirements for the CSOP?
To qualify for beneficial tax treatment, a CSOP must meet specific requirements on its participants, the Shares under option, value limits, and self- certification.
Options may be granted on a discretionary basis to any employee or any full time director of the establishing company (or any constituent company in the case of a group plan).
The shares under option must be ordinary shares, non-redeemable and fully paid up. The issuing company must not be under the control of another company (unless the company’s shares or the controlling company’s shares are listed on a recognised stock exchange).
Up until 6 April 2023, the shares used in the CSOP only qualify if there is just one class of shares in issue. Where there is more than one class in issue, the majority of shares of the same class as the CSOP shares must be either ‘employee control’ shares or ‘open market’ shares. Shares will be employee control shares if employees and directors (and former employees and former directors) control the company by virtue of holding shares of the same class as the CSOP shares. Shares will be open market shares if (broadly) the majority of shares of the same class as the CSOP shares are not held by persons who acquired them by reason of their employment or directorships (or by trustees who hold such shares on their behalf).
It is the employee control requirement that can make it difficult for a private company to grant options over a special class of non-voting shares. However, since 17 July 2013, the shares under option may be subject to restrictions. Therefore, one approach would be to grant CSOP options over ordinary shares but to attach restrictions on voting when issued.
From 6 April 2023 onwards, the “worth having” conditions are relaxed - making CSOP options possible for the first time for many companies that happen to have multiple share classes. This change also opens the possibility of a company choosing which of its share classes is most appropriate to grant under CSOP options (which could possibly be a new share class for the CSOP).
The Maximum value of shares over which a participant may hold subsisting CSOP options is £60,000 (calculated using the market value of the shares on the grant date): this limit is £30,00 for options granted before 6 April 2023.
This relatively low individual limit makes CSOP attractive for companies wanting to make small awards to a large number of participants. Many companies with CSOPs have parallel unapproved discretionary share option plans under which options with larger values can be granted.
The CSOP only needs to be registered with HMRC on or before 6 July following the tax year in which options are first granted. The exercise price of an option cannot be less than the market value of the shares at the date of grant.
How can a CSOP be used?
Qualifying CSOPs offer employers considerable flexibility.
Generally, options will become exercisable on the third anniversary of the date of grant, tying the option exercise to the availability of tax relief. This should ensure that there is no tax or NIC cost on exercise. The plan can, however, permit earlier exercise (without tax relief) if desired or; before then for certain ‘good leaver’ events or in connection with certain cash take overs without disrupting the income tax relief.
Options may be granted subject to performance conditions (ie if the condition is not met, the option will lapse). The company can include a rule in the plan to permit option-holders to sell some of their shares on exercise to fund the exercise price.
If you would like further information, contact Claire McGuigan or Geraldine Browne.